For most distributors, the disruption caused by the COVID-19 pandemic impacted the structure and security of their cash flow. Where before the pandemic they might’ve had room to be relaxed in monitoring the efficiency and viability of their inflows and outflows, disruption threatened to destabilize their cash reserves. A destabilized cash flow could quickly put a distributor out of business, or at the very least hurt their reputation with customers and suppliers.
Each company faced, and likely continues to face, a mixture of the following challenges:
Any combination of these challenges impact cash flow. In response, distributors scrambled to identify their risks and resolve cash concerns before they became dire. Some had plans in place and responsible parties assigned, others did not. Measures were taken, like reducing salaries, staff and travel. In any case, distributors worked more diligently to put their cash flow under a microscope.
If you’ve been fighting fires to this point to keep your cash viable, closely analyzing your cash flow and making mindful adjustments, there is great benefit to continuing that practice even as the pandemic subsides.
It’s time to pull back, get a 360-degree view, and evaluate how you might stabilize your cash flow and prepare for a variety of future scenarios, and how you might gain more accurate visibility over money moving through your company and improve your forecasting capabilities so there’s a smaller chance you’ll be caught off guard in the future.
Steps for Distributors to Own Their Cash Flow
1. Assess Current Cash Flow
Assessing and understanding your current cash flow goes beyond the basic equation of adding cash on-hand to inflows and subtracting outflows. As many learned during the pandemic, it helps to have a handle on when those transactions will occur and how that timing might’ve shifted amid disruption. Before the pandemic, the timing might’ve worked out so that you always had a good balance of inflows to easily manage your outflows. Now, customers might be paying later, causing you to come up short with suppliers or unable to pursue planned investments and strategies. Or it could be low demand challenging your cash flow.
2. Optimize Inflow/Outflow
To improve the health of your cash flow at any given time, there are several actions you can take. You can build these options into your response planning in the event of one of your scenarios, but you apply them today to fortify your cash flow. Options include:
These are actions you could take now or have in your back pocket for future disruption.
Cost containment measures can improve the health of your cash flow. Learn more in our e-book: Cost Containment and Cash Management in the Wake of COVID-19.
3. Perform Financial Modeling and Scenario Planning
Next, you must play out various scenarios that might impact your finances and conduct stress tests to understand next steps in the event of disruption. To perform financial modeling, you must first have that clear understanding of your cash flow so you can create a formula for applying various scenarios. Choose a handful of scenarios that involve your most critical factors, ranging from worst-case to best-case. To get the best, most repeatable framework for financial modeling, consider investing in software that supports it.
Once you understand the potential outcomes of each scenario, you’ll be able to develop specific action plans to address them.
4. Clean Up Inventory
Inventory is clearly an area where distributors can make adjustments that improve cash flow. Assess your inventory for opportunities to improve profitability with your stock. Consider using sophisticated data analytics software to simplify the process. Identify stock issues, such as dead inventory or low-margin products, and work to remedy those issues to save on carrying costs and optimize your inventory. There is tremendous value in conducting a careful assessment of your inventory and improving your processes overall, particularly after a shake-up like the pandemic.
Want to make the most of your inventory? We’ve identified seven moves to better inventory management.
5. Support Improved Forecasting
Being able to forecast when customers are likely to pay based on their behaviors, particularly closer to real-time, can help protect your business against a major cash reserve hit. Invest in technology that makes the most of your data and applies machine learning to keep you ahead of disruption and change. To support this effort, review your cash flow and budget more frequently so that you have a constant eye to your actuals versus your budget, expenses and opportunities.
6. Plan with What You Know
With all of this information and with supportive processes in place, you can start planning for the various scenarios you selected—including the most optimal scenario that enables continued growth and success. Direct your resources toward the optimal scenario as it remains relevant, always funneling resources toward your goals. In your planning, be sure to assign responsibilities and give assignees clear direction. Revisit your plans regularly to ensure they’re always in alignment with current conditions.
Steady Your Cash Flow Against Disruption
When distributors follow these intentional steps toward better cash flow management, they set themselves up for tighter control even as critical factors are challenged. If you work with a trusted business advisor experienced with distribution, you get the benefit of an outside perspective that is also informed by industry expertise.
Learn more about how to manage cash flow and contain costs as a distributor.
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