It has been almost one year since we first heard the words “pandemic.” During these past twelve months, some industries have been harder hit than others by the crisis that struck in early spring 2020 and then has continued to ravage the global economy ever since.
As you are well-aware, the manufacturing and distribution sector is one that has been impacted significantly by the far-reaching impact of the Covid-19 crisis. It is important to consider the range of challenges that many of these companies, like you, have had to face.
Cash flow projections are the first place to start a critical financial and business conversation.
Here are some guidelines and thought-provoking questions that can help you as a decision maker facilitate a meaningful discussion in order to ensure financial strength going forward.
As the owner or CEO, you should be working closely with your internal accounting team, including VP of Finance, CFO, Controller, and others, as well as with your external CPA firm, to review a cash flow dashboard daily or weekly in order to carefully monitor the company’s financial standing.
Because cash flow is a top priority, remember to keep lines of communication open with your vendors, advisors, and customers and continue to encourage an honest exchange so that you can avoid any unexpected or unpleasant surprises. Everyone benefits when you all work together as a team.
When talking about cash flow projections, there are many factors that should be considered, such as accounts receivable, accounts payable, payroll changes, inventory and the addition of new revenue streams. As you dig a little deeper into the metrics behind these key areas, you can leverage the information to respond more effectively to the challenges of the COVID crisis.
- Accounts receivable: When you are focusing on accounts receivable take advantage of the opportunity to determine if your customers are adhering to your payment schedule. If they are habitually slow to pay, you can suggest establishing a reasonable payment plan to help them get on track and avoid interest fees. It is also a good time to talk to your customers about the Paycheck Protection Plan (PPP) and find out if they received Federal, state or local loans or grants that could provide financial support for them during the pandemic. Ask about their fiscal position today and their future sustainability as you attempt to determine whether to maintain your existing relationships.
- Payroll: Cash flow is directly impacted by payroll and any significant changes that might occur during COVID or even after the pandemic has eased up. This typically includes monitoring the costs of advertising, hiring, and training new employees as well as any overtime costs that are incurred. High employee turnover and low morale can both be costly to your company as well. So this, too, must be carefully supervised – especially given the extraordinary challenges presented by a remote work environment. Costs to maintain a safe working situation and the expense of supporting employees working from home (including technology hardware and software) are factors that also influence cash flow.
- Inventory: Inventory strategies have been, and continue to be, challenging during the pandemic. These include decisions on how much inventory to hold and the best way to manage the inventory. One of the best practices that companies are currently embracing is to review inventory on a weekly basis instead of on a monthly basis. This enables decision makers to gain a better understanding of evolving trends and changes which helps them determine what new demands are occurring as a result of the pandemic. This will assist with planning for short-term demands and trends for products moving on a weekly basis.
- Banking relationships: Just as we emphasized the importance of maintaining open lines of communication with your vendors and customers, it is equally as critical to have a strong relationship with your bank – especially when times are tough. If you have not already done so, meet with your banker, reassure the bank of your current and projected future cash position as you also review your covenants and your ability to meet the borrowing base requirements. Stay close. Silence can be deafening – so don’t allow a dangerous chasm open between you and your bank. If you are in a strong financial position, ask to expand your line of credit and, based on your expected needs, continue to renew the line of credit if that is an option offered by the bank.
- New revenue streams: As you address the obstacles created by the pandemic, you may find that new opportunities have been created for you. Many manufactures have been able to adjust to new market demands and have turned a difficulty into an advantage. This may work for your company as well.
Cash flow matters – but don’t forget to keep an eye on critical KPIs
While your management team should be carefully analyzing key performance indicators (KPIs) on a regular basis –please note that this should be done even more consistently during a pandemic when things can change drastically from day to day. Come together as a leadership team to review and revise the specific key performance indicators that can help spell success or disaster for your company if not controlled properly.
Don’t get distracted from maintaining normal operations. The pandemic has wreaked havoc with all businesses, of all sizes, around the world. But there are some steps that you can take to help control the situation. Here are some additional areas that need extra attention from you at this time:
- Backlog days
- Net sales percentages
- New business
- Days inventory outstanding
- Supply chain challenges
- Marketing and branding initiatives
- Business interruption insurance and other protective measures
- Tax relief programs
What are savvy CFOs doing?
In our interactions with CEOs and CFOs from various manufacturers in the New Jersey area, we have seen many common concerns shared by all.
For example, when speaking with Dina Opici, President of Opici Family Distributing, she shared a unique and interesting perspective from within the wine industry, with an insider’s focus on accounts receivable. Because wines and spirits are in a high regulated sector, credit laws are tightly enforced. In the past, any company that was made to adopt “COD” payment terms had to work around the stigma of being forced to deal only in cash. But the impact of COVID has completely turned that scenario inside out. Today, companies are using COD status as a way to manage their cash flow and budget process more stringently.
The retail market has identified a range of ways to work closely with customers, continuing to address their needs in creative ways. New revenue streams that have emerged, for example, include residential deliveries for individual orders as well as supporting events and organizations that are using the retail platform to send wine to their members and guests. A champagne toast for a virtual wedding suddenly becomes a fun experience when the bride and groom have bottles dropped off at the home of each guest. But while retail wine stores are in demand, restaurants have struggled significantly. For Opici Wine this means working with their customers in order to help them survive. Recognizing that many restaurants have either closed completely or are open under reduced capacity which means with very limited occupancy, the policy on returned goods has softened along with the willingness to extend credit terms from 30 days to 90 or even 150 days as needed. “We are in this for the long haul,” noted Dina Opici, “so our main objective is to help our customers and colleagues in the restaurant sector to survive in the short term and eventually thrive again.”
This family business is looking to the future, while carefully and wisely drawing on the data they have in order to deal successfully with current challenges.
Final thoughts
As we move into the summer, we will hopefully begin to experience a slowdown of the spread of the corona virus. The outcome should be a decrease in its negative impact! Thus, it will be important for manufacturers to position themselves to take advantage of every possibility that arises, relying on data and financial information to drive smart solutions.
For more information on this topic please contact Dave Capodanno at david.capodanno@sobelcollc.com
