Now is not the time to be short on cash, buy up inventory, or both. Not when interest rates are rising. That’s double what it was a year ago. Revolving credit is difficult to find.When it’s not International Monetary Fund project Growth in the world’s developed countries next year will be just 1.4%. Now is not the time, when predicting and balancing supply and demand, disrupted by the pandemic and still out of balance, is more difficult than ever.Not when the number is small business bankruptcy; Although lower than during the peak of the coronavirus pandemic, it is a 23% increase compared to last year.
If not leading to bankruptcy, rising costs, changes in customer behavior due to the pandemic, lingering supply chain issues, uncertain sales in a volatile business environment, and almost certainly difficulty in obtaining financing. In combination, many viable companies may face a liquidity crisis. Short-term capital.
Although liquidity is often seen as a problem for finance, operations actually play a leading role in preventing and addressing cash flow problems. Companies that transform how operations, sales, and finance work together can generate cash and profits before interest, taxes, depreciation, and amortization (EBITDA), often in significant amounts and much faster. . By strengthening sales and operational planning, companies can take charge of their own destiny regardless of external disruptions. This is a particularly useful feature right now.
Midmarket companies can benefit greatly from making this transformation. We’ve seen companies improve their working capital by 20-30% and significantly increase EBITDA in just a few months. For example, a private equity-owned vitamin and dietary supplement manufacturer has seen an His increased by 10%. This led to reduced production and transportation costs.
Similarly, the impact of poor sales and operational planning takes a toll on the mid-market. Part of the reason is that these companies are at a disadvantage when they need outside capital.At Alix Partners 2023 survey, 96% of restructuring professionals said the middle market is most at risk due to today’s capital constraints. Mid-sized companies are also under threat because they often sell to large multinational corporations. Use your energy to pay the supplier later, In some cases, they were won on easy terms during the pandemic. Middle market companies tend to be less diverse and therefore more vulnerable to shocks. And because of their size, they have a shorter “liquidity runway” (the time it takes for a lack of cash to become a crisis) than larger companies.
Every company has some kind of process for adjusting supply and demand. In small businesses, it is often very informal. Sales are reported with the forecast, the CFO discounts it, production adds some as a cushion, and people adjust it every quarter. Although many companies have more sophisticated processes, they tend to be rigid and unresponsive to weak signals from the market, leading to fire drills on the production floor when unexpectedly strong results occur. If the situation worsens, sales will be discontinued. In both cases, the focus of the process is not on generating cash or margins, but on smoothly managing production.
Particularly needed in the middle market is a sales and operations plan that threads the needle between informality and bureaucracy and gives executives the ability to adjust operations to increase cash generation and profitability. It’s a process transformation.
This transformation has four elements.
A team of operations, sales, and finance working together.
When these teams work together, It gives you knowledge about how the company uses and generates cash. “Alignment” is the keyword. Operations and sales planning should be managed in a cross-functional “war room” but will not work unless all participants are clearly motivated by items that affect cash generation and profits. These items are not typically included in his KPIs for operations or sales. . In most companies, operations teams are evaluated based on things like cost of goods, defect rate, and machine utilization. Sales teams tend to track sales volumes and reward them with special incentives such as promotions. These incentives should be modified to include cash and working capital measures, such as days in stock, average discounts, and average days accounts receivable outstanding.
Forecasts also need to be revised, so model how the forecasted levels of production and sales will affect all three views of the company: income statement, cash flow, and balance sheet. Teams also need an enterprise-wide view of liquidity needs, the biggest threats to liquidity, and the biggest sources of cash – which products and lines of business are consuming or producing the most cash. Masu. These will tell you which levers you can pull.
More precise and flexible predictions.
It’s not uncommon for CFOs to lower their sales team’s forecasts by as much as 25%. One reason for this is that sales teams tend to be overly optimistic, and their forecasts may not be fully defensible. Another issue is their timeline. In our experience, building a rolling view of demand over the medium to long term (3-14 months) and using it to make 3-month forecasts with sufficient certainty to make purchasing and marketing decisions. It is best to create and adjust. weekly or monthly. Too far and the plan becomes unreliable. If you get too close, you won’t be able to act strategically.
Don’t forget to use churn and loyalty data to test, validate, and adjust your predictions, as many businesses do. We need to adjust this view of demand in four ways. First, build a complete picture of profits and volumes to get a clear picture of where cash and his EBITDA are (and aren’t) coming from. You want to know which products and customers bring in the most profit, which customers bring you the most profit, and pay close attention to their orders and actions. Next, as with the entire budget, create long-term outlook scenarios. For example, what happens if demand is high, moderate, or low, or what happens if sales suddenly skew towards the cheapest or least profitable products. you sell Third, determine in advance the indicators that indicate whether the scenario is coming true. This makes the warning difficult to ignore. Finally, use monthly and quarterly reviews to track expectations against the plan as well as revalidate assumptions.
Equally rigorous supply maps.
This should include the availability of materials, components, and labor. In particular, you need to identify components and supplies that have the longest lead times, or that need to be sensitive to price or supply shocks from knowledge of upstream conditions. Many providers are helping businesses build “command towers” for their supply chains that track inventory status and prices in near real-time, often with the help of AI. Once the almost exclusive domain of multinational corporations, these are now within the reach of most middle-market budgets.
Operations that optimize for profitability, not predictability.
An operational plan that guarantees uninterrupted production of the least profitable product is not appropriate. With knowledge of product and customer profitability, better information flow from the field, and cross-functional teams, you can maximize operational flexibility and move production from one location or product to another. You will be able to move it from place to place and from product to product. Or prioritize orders from more profitable customers. Similar changes can be made to inventory management. Strategically, inventory becomes a liquidity drain or a new customer acquisition tool (“bad” or “good” inventory) and is managed accordingly. Thinking over the long term, you can redirect capital expenditures to increase operational flexibility in areas that have the most direct impact on cash and profits.
These programs freed up $17 million in working capital for the $2 billion Mississippi Valley-based consumer goods company, which translated into approximately 180 days of savings. The company’s operations were thrown off balance and demand soared as the coronavirus wreaked havoc on its supply chain, with big online retailers suddenly scraping business from local stores. That predictive model was photographed. Without knowing where the revenue was coming from, one business unit was costing him nearly $1 million in late delivery penalties and airfare. Working based on guesswork, factories produce the wrong combination of products, procurement buys too little of some components and too much of others, and the fulfillment rate (completely and on-time) (percentage of orders) plummeted from 95% to approximately 75%. To cover the orders, the operations team built up $12 million more finished goods inventory than the company needed. Previous attempts to address this issue have looked at the problem in parts, such as supplies and components, production planning, and forecasting, rather than systematically. We worked with them to build a high-level capacity model that can reveal potential supply and demand imbalances months earlier than previously possible. Improving the analytical skills of your forecasting team. Then, hold monthly sales and operational planning meetings with data and decision makers in the same room.
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Without a systemic perspective, the incentives and good intentions of each player in this game (sourcing, producing, selling) will almost always tip the balance of the game. Operations teams are uniquely positioned to integrate systems because they are the first to feel the pain in the form of inventory rooms that won’t be emptied or orders that won’t be filled. By the time you see pain in cash or EBITDA, it’s too late, and sometimes it’s too late.
