Managing cash flow forecasting is, and will always be, integral elements to business success. But 2020 has changed the course of ‘business as usual’ for the forecasting process of manufacturing operations large and small, and all around the globe. In fact, COVID-19 has drastically changed everything we traditionally apply to assess risk and strategically plan for the near term. Even businesses that have not yet been adversely affected by the pandemic will need to start over. Why? Because many of the drivers of business are no longer the same today.
To move business forward, management teams will need to start by changing their mindsets and re-examine many of their assumptions. What happened last year at this time is no longer a valid predictor for operations today. Businesses will need to become more proactive to assess their cash flow requirements, and do so more frequently. Additionally, they will need run various scenarios to assess potential risks, including their supplier networks and customers.
The importance of cash flow in times like these should not be overlooked. As part of your business continuity plan, it is essential to build in cash management strategy and risk identification and mitigation plans.
3 Steps for Effective Forecasting and Cash Flow Management
Below are ‘3 Steps’ to help businesses manage cash flow and apply a new forecasting mindset to move business forward:
- Increase communication across business lines.
Due to volatility, sales is no longer the sole driver of business activities. Production, sales, distribution, and management teams will all need to collaborate to build more accurate forecasts. Each department should report trends and perspectives regularly. Decisions will need to be measured and made diversely – looking at costs, margins, risks, sales, potential profitability – to navigate between risks and opportunities.
- Step up proactive planning, and reevaluate often.
As we’ve learned, things – border shutdowns, trade agreements – can and do change fast. While businesses are asked to focus on ‘resilience’ right now, they should also focus efforts on continual ‘reevaluation.’ Normally, companies evaluate monthly by comparing ‘budget to actual.’ Now, we see the need for continual monitoring of variance in thresholds, but also the budgets in the first place. Inputs, for example, will now fluctuate based upon price, availability, budgets, and other variables beyond control. Reevaluate your Key Performance Indicators (KPIs) dashboard, communicate risks, and make adjustments based on where things go and where things need to be. Ascertain what your risk tolerance level will be, what opportunities you foresee, and build a proactive plan to control what you can. Then reevaluate all of these, often.
- Look forward, not back.
Group thinking and the tendency to do things in the same manner due to past success can be a company’s biggest destructor right now. To move forward, we must question old assumptions that were used to develop current plans. It’s time to challenge all assumptions, have hard conversations, and bring on diverse thinking to move ahead. Know your data – what are the high and low thresholds, and at what costs. Challenge supply chain managers to go beyond the effects of disruption and inventory shortages on operations, and evaluate the financial constraints on inventory levels. Determine, communicate, and implement business plans around priorities that have the potential to be effective in today’s environment.
Since the COVID-19 pandemic started, manufacturing businesses have been forced to switch perspectives. To avoid lost revenue due to interrupted manufacturing operations and overwhelmed supply chains, companies must think strategically when forecasting cash flow. No longer can we rely on Profits and Loss (P&L) for cash flow management. To truly manage and assess cash flow in 2020, it will take repetitive actions: monitor regularly, forecast, reforecast, and reevaluate frequently – across all operational and non-operational parts of your business. The importance of planning for uncertainty to minimize surprises, and conserve and manage cash flows, will be crucial to move your business forward this year.
Contact a K·Coe advisor with questions, or for help with forecasting and cash management strategies.