Sales and operations transformation strategies for product companies to avoid cash flow and liquidity risks

Posted October 24, 2023

While managers often view liquidity risks as a finance issue, team behaviors across sales and operations directly impact corporate liquidity, working capital and cash flow. Enhancing these groups’ alignment, forecasting, supply chain linkage, and priorities can significantly strengthen cash positions.

Rather than siloed functions, collaborative sales and operations teams improve projections and inventory calibration, reducing working capital needs.

Prioritizing profitability over predictability allows flexibility to meet demand fluctuations.

With cross-functional cooperation, data sharing, and adaptable mindsets, companies can optimize liquidity. The resulting earnings and cash flow improvements exceed isolated finance efforts. Unified sales and operations partnerships, not just financial controls, are key to corporate liquidity management.

I recently read an interesting article published in the Harvard Business Review, about companies that face liquidity problems, never want to be short of cash, or long on inventory, or both: not when interest rates are double what they were a year ago and revolving credit is harder to get.

The article mentions a few other macro reasons that having cash on balance matters:

the International Monetary Fund projects that the world’s advanced economies are being forecasted to only grow a meager 1.4% next year
it’s harder than ever to predict and balance supply and demand, which was exacerbated by the pandemic and have not yet recovered
because business bankruptcies, are up 23% over last year

The HBR article author’s point out that their are companies with solid businesses that could find themselves in liquidity problems because of the situation brought on by rising costs, pandemic fueled changes in consumer shopping behaviors (shift to online), lasting supply chain issues, uncertain sales in a shaky business environment, and lack of access to cheap short-term capital.

Funding or cash flow liquidity risk is the chief concern of a corporate treasurer who asks whether the firm can fund its liabilities

Too often liquidity risks are viewed as a finance department issue, but the HBR article makes the case that operations departments are a contributing factor in addressing or preventing cash flow issues. Meaning businesses that learn to better align and integrate how sales, finance and operations work with each other it can boost

cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) — often quite a lot and often very fast. Bolstering sales and operations planning allows organizations to take a proactive approach regardless of external disruptions.

Product Manufacturing Companies Can Benefit from Improving Working Capital

The HBR article cites an example, companies that learn to improve working capital by 20% can see a boost in EBITDA in a short period of time.

Stating “one private-equity-owned manufacturer of vitamins and nutritional supplements, for example, saw a 10% gain in EBITDA largely by making its overseas sales and distribution (where most of its growth potential lay) more connected with manufacturing operations in the United States. That helped drive down production and shipping costs.”

On the Flip side of this coin, poor operations and sales efforts can really have a negative impact on cash flow.

In a AlixPartners’ 2023 Turnaround &Transformation report, surveyed experts who work with troubled companies cited that the number one challenge they face this year is availability and cost of capital. The WSJ recently reported midsized companies who often sell to large conglomerate organizations use their muscle to pay suppliers later, in some cases trying to lock in easy terms they won during the pandemic. This can put stress on smaller companies’ ability to weather shocks shorten the time they have before a cash shortage becomes a crisis.

The WSJ just reported that a Diaper startup Hello Bello, founded in 2019 by Kristen Bell and Dax Shepard, filed for bankruptcy with a plan to sell its business after its pandemic-fueled expansion faltered due to rising shipping costs and inflation.

Every company has some kind of process for aligning supply and demand

From informal processes in smaller firms to rigid in larger ones. Often sales provides forecasts, finance discounts them, and production pads for caution. Quarterly adjustments attempt responsiveness. However, these processes tend to ignore weak market signals, causing production fire drills when sales spike or fire sales when they lag. The focus stays on production smoothing, not cash and margins.

More collaborative, data-driven processes are needed. Sales and operations should continuously share insights, stress testing projections against market indicators. Supply chain and inventory buffers must remain flexible to meet fluctuations. With cross-functional transparency, responsiveness to demand nuances, and a cash flow mindset, companies can optimize both operations and profitability.

Restructuring and private equity suggest company’s should transform their sales and operations planning process, with a focus on finding a middle ground between informality and bureaucracy and to give executives the ability to adjust operations to increase cash generation and profitability.

The Alix Partners stated that this transformation has 4 main components.

1 An aligned team among operations, sales, and finance

Operations and sales teams should collaborate in a cross-functional “war room” to align planning and optimize cash flow.
For alignment to work, incentives must motivate cash generation and margins, not just traditional metrics like cost, defects, or volume.
Forecasts should model how production and sales levels impact income statements, cash flow, and balance sheets.
The team needs an enterprise-wide view of liquidity needs, threats, and sources to identify cash flow levers.
With shared data, cash-focused incentives, and integrated financial modeling, sales and operations alignment maximizes liquidity and margins.

2 More rigorous and flexible forecasts

CFOs often cut sales forecasts significantly due to optimism and lack of validation.
Rolling 3-14 month demand views, turned into 3-month tactical forecasts, provide strategic insights without going too far out.
Customer churn and loyalty data should inform continuous forecast adjustments.
Build profitability views, not just volume, to identify cash flow and EBITDA sources.
Create demand scenarios tied to early warning indicators, not just tracking to plan.
Frequent forecast reviews should revalidate assumptions, not just compare to projections.
Multilayered modeling with continuous fact-based refinement improves forecast reliability and agility.

A similarly rigorous map of supply

Supply chain visibility should include material, component, and labor availability.
Identify parts with long lead times or potential for price/supply shocks.
Many providers help companies build supply chain “control towers” to track availability and pricing in near-real time, often AI-enabled.
Once only used by large companies, control towers now fit mid sized company budgets.
Map the supply chain to high-risk areas and build responsiveness.
Anticipate and mitigate shortages to avoid production bottlenecks.
Supply chain visibility and agility prevents cash flow interruptions.

Operations that optimize profitability, not predictability.

Optimize operations for profitability over predictability. Prioritize profitable products and customers.
Leverage flexibility to shift production and inventory strategically.
“Good” inventory enables growth; “bad” ties up capital. Manage accordingly.
Long-term, increase operational agility to boost cash flow.
A consumer goods company freed up $17M in working capital using integrated sales and operations planning, capacity modeling, forecasting analytics, and cross-functional alignment.
This addressed volatility from COVID supply/demand shifts.
Collaboration and data fixed poor forecasting, production mix, and inventory issues.
Systematic alignment of sales and operations data optimizes working capital and operations.

Conclusion

In isolation, well-meaning procurement, production, and sales teams inadvertently create imbalance, despite good incentives. The fragmented view obscures systemic connections. Being at the nexus of inputs and outputs, operations feel the pain first through jammed stockrooms or unfilled orders.

By then, cash flow and EBITDA damage has already begun, often too late for quick correction. Operations is uniquely positioned to unify cross-functional data and plans. Collaborative forecasting, production planning, inventory strategy, and continuous calibration prevent problems before they propagate. It takes an integrated perspective to align organizations around profitability and liquidity, not just departmental metrics. Underpin any new money need with cash flow analysis of operations under various risk scenarios.