For many distributors, the disruption resulting from the COVID-19 pandemic and the subsequent supply chain challenges impacted organizational structures and the security of cash flow. Where distributors once had the room and peace of mind to be relaxed in monitoring the efficiency and viability of inflows and outflows, disruption destabilized cash reserves and showed the importance of greater insights.
There are lessons to be learned from this event that we can apply to distribution organizations and plan for business disruption at all levels. A destabilized cash flow can quickly put a distributor out of business or, at the very least, hurt your reputation with customers and suppliers.
When weathering a major disruption – from natural disasters to the impact of a large-scale supply chain upset – it’s not uncommon for distributors to face a mixture of challenges, such as:
- Customers paying later than usual to maintain their own cash reserves.
- Vendors requesting payment sooner than usual to improve their cash flows.
- Demand fluctuating in an unpredictable manner.
- Demand increasing or decreasing to a level you can’t support or sustain as a distributor.
- Supply chain disruption impacting capacity to stock in-demand goods.
- Increased cost of operations and logistics.
Any combination of these challenges can impact cash flow. Rather than scrambling to identify risks and resolve cash concerns in the heat of the moment, it’s best to have reliable plans in place. Distributors must work diligently to put cash flow under a microscope at all times. There is great benefit to continual, close analysis of your cash flow and making careful adjustments so you can be prepared for any form of disruption, large or small.
6 Steps for Distributors to Own Your Cash Flow
Distributors need to pull back and get a 360-degree view of your cash flow and operations in order to efficiently evaluate how to stabilize your cash flow and prepare for a variety of scenarios. This exercise also allows you to analyze how you can gain more accurate visibility over money moving through your organization and improve your forecasting capabilities so there’s a smaller chance you’ll be caught off guard in the future.
Here are some steps you can take to gain more control over your 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. It also helps to have a handle on when those transactions will occur and how that timing might shift during any kind of disruption.
Although you might have previously relied on perfect timing, trusting that you’ll always have a good balance of inflows to easily manage your outflows is a risky way to operate. Customers could pay later for a variety of reasons, which leaves you short for suppliers, unable to pursue planned investments and strategies, or, low demand could challenge your cash flow.
Ask yourself the following questions:
- What are your actuals now?
- Do the actuals align with your budget?
- How does that impact your cash flow overall?
- Are you able to maintain an ideal cash reserve?
- Has that ideal changed, if at all?
2. Optimize Inflow and Outflow
To improve the health of your cash flow at any given time, there are several actions you can take. You can always wait and build these optimization ideas into your response planning in the event of disruption, but it’s best to begin applying them today to fortify your cash flow and strengthen your organization.
- Getting more focused and immediate with invoicing and collections.
- Allocating more resources to your collections efforts.
- Investing in technology that makes cash flow-related processes easier and less manual for staff, suppliers and customers.
- Offering more convenient payment options.
- Adjusting payment terms with your vendors, such as adjusting payment dates to align with your actual inflows.
- Analyzing areas to reduce costs in operations, including facility costs and funding for departmental initiatives.
- Dedicating resources to new customer acquisition and expanding existing accounts.
Cost containment measures can improve the health of your cash flow. Learn how an ERP system can help organizations analyze costs.
3. Perform Financial Modeling and Scenario Planning
You must play out various scenarios that might impact your finances, and conduct stress tests to understand next steps in the event of disruption. Risk management strategies are critical for long-term success in any kind of market, especially a temporarily unstable one.
To perform financial modeling, you have to clearly understand 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 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.
5. Support Improved Forecasting
Being able to forecast when customers are likely to pay based on their behaviors, particularly closer to real-time, can 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 frequently so you have a constant eye on 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 to enable 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 stay in alignment with current conditions.
Steady Your Cash Flow Against Disruption
When distributors follow these intentional steps toward better cash flow management, you set your organization up for tighter control, even when critical factors are challenged. If you work with a trusted business advisor experienced with distribution, you get the benefit of an outside perspective with industry expertise.
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