How South Pacific Seeds uses working capital to navigate seasonal cash flows and seize growth opportunities

SPS has grown its range of production crops and farming locations to meet the rising global demand for quality seeds. Following the early success of its Australian business, SPS has diversified its operations, establishing a group of companies in New Zealand, The United States and Chile.

Alan Golden, SPS’s Accountant, explains the two sides of the business. The first is producing and shipping mostly hybrid seeds that push the boundaries of agriculture. The second is importing and distributing seeds to wholesale customers that match their growing conditions and requirements.  

Like many agricultural producers and exporters, SPS is navigating long cropping cycles and seasonal fluctuations that can bring its cash flow under pressure. At the same time, extended import lead times mean the business must hold significant inventory to be responsive to customer demand.

According to Alan, with cash tied up in receivables and inventory, the business sought flexible access to liquidity to fund its ongoing operations. With CommBank’s working capital solution, SPS uses these assets as security to smooth its cash flow cycles and move quickly when a growth opportunity emerges, like a suitable acquisition target. 

Managing long and unpredictable sales cycles

For SPS, working capital is constrained by several factors. This includes supply chain bottlenecks in previous years and, more recently, inflationary conditions. He says the corollary is slower cash conversion.

At an operational level, SPS also manages a long lead time from planting crops for contract multiplication to receiving payment, a process Alan says can take years for some customers.

“We might plant a crop in February one year, harvest it in March the next year, and then it will be cleaned and shipped. It means we may not be paid until two years after it’s put in the ground,” Alan says.

“The quality of the seeds also drives our contracts, and you don’t know the quality is there until the seeds are cleaned. Then you need to keep your growers happy along the way by ensuring they get paid promptly.”

Alan says that SPS is focused on managing its cash flow risks and ensuring enough margin is left over to sustain profitability. “We have money going out across the growing cycle, and then it all rolls back in in a hurry", Alan says. “We see it yearly, which is where CommBank’s working capital solution really helps manage cash flow volatility.”

Gaining flexible access to working capital

According to Alan, SPS accesses working capital by borrowing against the value of its domestic debtors and inventory. He says that with CommBank’s Working Capital Facility, SPS can harness the value within these domestic assets to fund its export operations.

“We have a long value chain when importing and exporting, so all you can do is have an approach to borrowing that flexes with the business,” Alan says. He explains that CommBank’s Working Capital Facility also “takes time out of the process” to seek approval when extending facility limits compared to other finance options.

“Our Financial Controller will look at operations and our order book and increase or decrease the facility based on future cash flows. We continue to look at it to be certain we have cover even if we don’t use it, and the compliance and reporting side is quite easy,” Alan says.

For SPS, the business can plan and line up its working capital, term debt and cash flows to “remove any troughs”. Alan says that if you have a good year and excess funds, the business could reduce debt or use working capital to fund growth.

Seizing valuable opportunities

Given SPS’s long-running operations, it is now a mature and well-diversified business with global market penetration. That means commercial opportunities are more likely to come from acquiring new businesses than organic growth.

“Identifying M&A targets and getting them across the line can be challenging,” Alan says. “You need to be in a position to act quickly to seize an opportunity and work through false starts and integration issues if a transaction proceeds. That’s where working capital can play an important role.”

Alan recalls a time when a shareholder in SPS New Zealand wanted to sell down their holding. SPS wanted to acquire that holding and add to its ownership of the highly profitable company.

Rather than wait three to six months negotiating funding, it used CommBank’s Working Capital Facility to purchase the holding. Alan says that “gave SPS the confidence to move on the opportunity. Given the option to acquire the equity came up suddenly, acting quickly made the difference between securing the valuable stake and possibly missing out.”