The old trope is true: cash is king. As businesses continue to grapple with economic uncertainty, the coming years will be decisive not just for which businesses survive, but also which ones will transform and thrive.

Through my extensive experience working with manufacturing and distribution companies, I’ve seen companies that run the gamut from ad hoc management to extremely thoughtful and meticulous planning. It is the latter category — those who take pains to shave a penny off of per-unit production costs — that have been able to achieve admirable gains even through tumultuous times.

In this article, we share five simple (but not always easy) steps to get your cash flow under control:

1. Prepare an annual budget

If you pick up any cost management book, you will quickly learn that Johnson & Johnson is the gold standard of budgeting success. While many financial leaders of mid-market companies may feel they could never emulate Johnson & Johnson’s achievements, many of the lessons they learned are useful. The main secret of their success is their comprehensive planning, budgeting, and control system that underlies all decision making. Budgeting exercises are completed on a consistent basis throughout the entire company, including long-range plans that look two to five years ahead. They have multiple budgets that determine how much they’ll spend on an ERP system, how much they will spend acquiring companies, and what infrastructure will enable the execution of their long-term plans. Business leaders would be wise to adopt this level of planning.

Leaders of mid-market businesses can also learn from how the team at Johnson & Johnson carefully monitors market movements. They have teams dedicated to observing what's happening in the market and making recommendations for what the company must do to react to that market. This includes what products to invest in, what acquisitions to make, which geographies to expand to, and even which product lines or geographies to divest from. The essential learning is that these matters need to be planned in advance, and not just left to ad-hoc or opportunistic decisions.

Finally, here is a common pitfall to avoid: Sometimes a CEO or a CFO will create a budget without consulting department heads, so when it comes time to execute on the plan, departmental leaders must either overspend or be left without the resources they need to drive results. Each department needs to be invited into the conversation and think strategically about the budget. Securing buy-in early gives you the best chance of having all departmental leaders invested in executing the plan.

2. Compare the budget to actual spending consistently

Creating a detailed budget is just the first step. Many leadership teams go wrong by creating a budget, but never reference it to make decisions. You must compare your budget to your actual spending on a regular basis. In addition, the comparison must be made with enough detail to understand overspending and properly analyze it.

Similarly, while virtually every company tracks profits and losses (P&L), many miss the most important part: monitoring P&L with enough granularity to uncover real insights and improve margins. You need a detailed analysis of profitability at a product, service, unit, and department level. Often companies will understand their direct costs, their sales, and some of their indirect costs, but they tend to miss costs like talent management and allocation of fixed costs (e.g. how much of the executive team is dedicated to certain products and/or initiatives).

Industry research indicates often less than 50 percent of products are truly profitable when you consider all direct, indirect, and fixed costs. Overhead absorption matters here: it is critical to understand the marketing costs, business development costs, rent, and other overhead costs when you are tracking profitability. One reason why many companies struggle with granular financial reporting is that they lack reliable and timely financial reporting processes. To sidestep this, you must invest in a best-in-class ERP system — NetSuite, Microsoft Dynamics, Epicor, and SAP tend to be the frontrunners for medium-size companies.

3. Understand your supply chain and make it more efficient

In 2022, supply chain officers have some of the most sought-after skill sets in manufacturing companies. They control millions of dollars of spend and can realize substantial savings by sourcing products strategically.

The cost to ship a product out of China has quadrupled over the past year — and this is not just due to the pandemic; this is due to a consolidation in the shipping industry over the past 10 years. There are currently less ships, so they can charge more. Ships have also been traveling slower to minimize their carbon footprint and meet ESG requirements, which has increased costs. Even when the pandemic clears, we won’t regain the low costs of shipping from pre-COVID times.

To combat this, we’re seeing a broader “on-shoring” where companies are manufacturing products within the States to save on shipping costs, especially in Texas and western Pennsylvania. Using multiple ports of entry has helped as well — in the past, most ships would port at Long Beach, California, but using ports of entry in locations like Georgia and Florida have prevented ships from getting log-jammed.

The essential lesson for business leaders is to invest in top-tier supply chain talent to find efficiencies and save the company money. It is not just a matter of shipping — after you get it off the boat, will you use the railroad or trucks? If the supply chain officer is able to solve problems in the supply chain, it's going to help the company contain costs.

4. Use data analytics and the internet of things (IoT) to become more efficient

Experts say we are in another industrial revolution as artificial intelligence, the internet of things, and data analytics radically shape what’s possible in our economy. To gain a competitive advantage, companies must leverage the internet of things, which essentially means utilizing data from outside your company to help your company become more efficient. One great example is when Starbucks was having trouble getting their cups to their different locations around the world in an efficient manner.

The CEO of Starbucks was discussing this issue with the CEO of IBM, (who had recently purchased The Weather Channel). The pair came up with an idea to launch a study using data from both The Weather Channel and from Starbucks stores. They discovered that 65 degrees Fahrenheit was the tipping point between when consumers would buy hot coffee versus cold coffee. They then used The Weather Channel data to look at weather patterns all around the world and predict the next week's weather in Starbucks locations around the globe. As a result, Starbucks was better able to predict consumer behavior and reduce their cost and delivery of cups by millions of dollars.

Right now, most companies are using data analytics for quality control and customer complaint issues, but only a few have truly tapped into its full potential. Not enough companies are investing in the talent or the data technology that can easily predict their customers' behavior and map it into their supply chain. Business leaders who do this will be eons ahead of their competitors in a turbulent economy.

5. Collect fast and pay slow

As a result of high interest rates and rampant inflation, business leaders today need more cash and more capital to match previous sales records. What’s more, supply chain disruption has put an end to the practice of “just-in-time inventory,” leaving many of our clients stockpiling inventory to avoid potential shortages.

However, there is a way to minimize the increase in working capital requirements: a) Collect your receivables quicker than you pay your vendors. I recommend investing in a highly talented customer service department, as an efficient, strong collection department pays for themselves multiple times over. Not only can they get customers to pay under 45 days (or whatever the terms are when you send the invoice), but they will also limit bad debt write-offs by being able to identify problems very quickly. b) Get your suppliers in the habit of expecting your payment 90 to 120 days after shipment. This is easier than you think, because most companies do not invest in or monitor their customer service group as much as they should. The result: You'll have more cash on hand to handle the unexpected bumps, and low working capital levels can be very beneficial to sellers in a capital transaction.

Parting thoughts

In business, as in life, you have to be prepared to handle a crisis. In a recent survey we conducted of manufacturing and distribution leaders, business owners said their greatest concern was having to handle another crisis like COVID-19. But many businesses have survived many crises, including the 2001 dot-com crash, the 2009 financial crisis, and the most recent COVID crisis. The companies that did best during crises are the ones that were able to adapt and take chances using informed data. For example, the companies that invested in a new product because they saw an opportunity, like pivoting to producing PPE during COVID, are the ones that fared best.

Ultimately, you have to work on improving the fundamentals of your business every day, not just trying to sell products. Making your business more profitable also comes down to smarter cash flow management. If you can do that, you will be prepared for the next crisis.

If you have questions on the best way to manage your company’s cash flow during turbulent times, please contact Mark Fagan at mfagan@citrincooperman.com.