When you’ve committed yourself to go above and beyond to pay your suppliers ethically, your core product quickly becomes your biggest cost. It’s a challenge that Nick Curran faces daily as the finance director of Pact Coffee. The company paid its farmers 65% above the Fairtrade base price in 2020. Reducing that cost is out of the question, so maintaining gross margin is a top priority.
“I have to closely monitor the rest of the P&L lines that make up our cost of sales and really negotiate hard with suppliers that are not farmers to make sure we’re as efficient as possible,” says Nick.
Pact commits to six-to-18-month contracts with its farmers. This gives farmers the security of knowing they’re receiving a solid income for their coffee, and Pact is guaranteed its coffee supply. However, it’s a fairly large cash commitment that has to be managed pretty carefully, Nick explains.
“We do have financing arrangements in place to help us do this, but it’s really quite a juggling act. How much coffee should we commit to in advance? We have a drawdown arrangement with our coffee-buying financier. We need to decide the appropriate time to draw this down and how much cash to tie up in stock.”
Becoming carbon neutral
In tough times, it would be very easy to fall back on focusing on financial metrics. Pact has a number of social and environmental KPIs to ensure that ESG metrics are given as much importance as financial ones. It has recently applied to become a B Corp to provide independent validation of its social and environmental standards.
“That will help us keep our environmental KPIs at the forefront, alongside our financial KPIs. For example, one of the B Corp requirements is that your board reviews your use of social and environmental KPIs. Over the next 12 months, we’ve got a KPI to move to 100% recyclable packaging, and ensure our roastery is carbon neutral.”
The company has been reviewing its governance procedures to ensure that everything is in place to meet those requirements. A lot of this is formalising the approach that Pact already did, says Nick, though the company is adding to its processes.
As a fast-growing and adapting company, technology is critical for running the finance function efficiently, Nick explains. As much of Pact’s processes are automated as possible. The company uses Xero with a piece of software called DataDear, which connects Xero with Excel. This provides more flexibility for report building.
Spendesk is used to manage credit card spending and keep track of subscriptions. “Going through invoices and working out who had spent what was quite a time consuming and very manual process, so it really reduces our time spent that month-end.”
The data side of life
Pact uses Zoho Analytics for real-time data analysis and works with an outsourced data science company the make the most of it. Dashboards in the platform are set up to monitor activities across the business. In the finance function, it is used to track revenue and customer growth. “It’s a great way of providing a snapshot of business performance.”
One tricky quirk of the coffee industry that Nick and his team have to manage is that coffee is always traded in US dollars. As FD, he has to regularly monitor the USD exchange rate, as large fluctuations could considerably impact gross margin. “We often take out currency hedges to lock in an exchange rate. Big swings in effects really impact our margins. It’s something we have to manage really closely.
“After the 2016 Brexit referendum, for example, the pound jumped off a cliff, which was very tricky to manage.”
Looking to the future
The next step for the company is to continue to grow and improve its processes and its non-financial reporting so that the business can scale up while maintaining the ethical principles it was founded on. Nick’s next project is to work on revamping Pact’s inventory management system, away from the current spreadsheet-based approach (“quite painful and laborious.”) with a mostly automated process.
“Something like that will improve the accuracy and really give us more insight into the profitability at the product level.”