In these challenging times of Covid-crisis, businesses should be run in a slightly different way. More than ever Cash is King. The importance of cashflow cannot be stressed enough and doing a correct planning of cashflow is of paramount importance.
It’s important to gain the right insights on how the cash-to-cash conversion is built up. In normal circumstances, companies focus on profit and loss statements, focus on what can be done to grow the sales and how the costs can be optimized in order to generate better profits. In the current situation CFO’s should focus on the balance sheet and on the different elements of the working capital: accounts receivables, accounts payables and inventory.
It is important to have visibility on how the working capital will evolve over time. Optimact, a supply chain planning tool, is able to visualize what will happen with the different cash flows over time, at which moment sales revenue will generate cash, when purchases will burn cash and how inventory will evolve and influence our cash position. In order to act on the different elements in an appropriate way it is important to act in a coordinated way, supported by the right vision on the situation.
Simulate various scenarios makes it easier to take the right decisions in terms of adjustments needed to be made to keep cashflow under control. Let’s say we know that one of our customers will stop or reduce buying our product, we will need to adjust the forecasts and the cash income. We will possibly need to compensate the loss of cash income by taking the appropriate actions. With Optimact it is possible to simulate various scenarios making these measures understandable and visual for all stakeholders within the organisation, resulting in easier and faster decision making.
To have a good view on the additional elements of the cashflow, we need to make sure all elements that create the ins and outs are taken into account. This means the regular exploitation flows like sales, purchases of raw materials and/or commodities are enriched with the other costs like payment of wages etc. but also the financial flows like payment of interests, … This other elements are fairly easy to transfer via the interface so we are able to combine everything in one environment.
The Supply Chain Manager should also act more as a CFO. In normal situations, the inventory is mostly highly driven by the Customer Service the company wants to deliver and the operational efficiency that needs to be guaranteed. Customer Service and operational efficiency will likely push inventories to higher levels. In this crisis period we might want to turn things around and give a much higher weight to the reduction of Working Capital. What if the Supply Chain Manager wants to embrace this philosophy very fast and in a more systematic way ?
Practical actions that can be done are to set up cashflow forecasting:
- Implement a thought through cashflow forecasting process
- Implement a cashflow centric spirit in the organisation focused on cash, not on profit
- Set up good cashflow / working capital reporting to visualize the issues quickly
- Monitor your cash forecast weekly and review your scenario’s
Long story short, cashflow planning is essential for a better and positive cashflow. Good Supply Chain planning helps to visualize the issues and take right action fast.