Why Your Cashflow Matters More Than Ever During the Automotive Industry Disruptions

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Remember the good old days, when the Automotive Industry operated on complex, global, just-in-time supply chains that relied on synchronized production, coordinated planning up and down the supply chain, and steady material flow?

Recently, that system has faced unprecedented stress. From semiconductor shortages to geopolitical tensions, rising logistics costs, global pandemic, and most recently, tariffs, supply chain disruptions have become a persistent challenge. 

For anyone whose business touches the automotive complex - especially small to mid-sized suppliers - managing cash flow effectively during such uncertainty is not just important, it's critical for survival.

Understanding the Impact on Cash Flow

Supply chain disruptions create ripple effects that directly impact cash flow. Production slowdowns delay shipments.  That means postponed payments or order cancellations. Alternative suppliers and excess inventory increase costs. You face extended lead times and higher working capital requirements. 

All this ties up cash that would otherwise be available for operations, payroll, or paying down debt.

One Real-Life Example Of How This Impacts A Small Supplier

For example, a Tier 2 stamping supplier awaiting steel coils might be forced to shut down assembly lines, which delays revenue. At the same time, they still need to pay for fixed costs, materials, etc., which can cause a liquidity squeeze. Additionally, by stopping the flow of production, the company may face penalties from its customers (Tier 1s or OEMs) if they cannot supply enough product to keep those customers' lines running.

Key Strategies to Navigate Disruptions

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Here are 5 Key Strategies that will help you manage your cash flow and maintain liquidity during these challenging and unprecedented times. Whether you are spending $10,000 on a new Fork-truck, or $10,000,000 on a new complex assembly line, these strategies will help you to manage your cash and maintain liquidity during trying times.

Improve Forecasting: Accurate forecasting is the foundation of effective cash flow management. In times of volatility, automotive companies must move beyond simple forecasts and embrace dynamic scenario planning. Consider best-case, base-case, and worst-case outcomes, and model how each will affect cash inflows and outflows. This allows decision-makers to anticipate shortfalls and adjust spending proactively. This is just one of the ways we at Doescher Group help level the playing field for self-made owners.  

Diversify Suppliers: Relying on a single supplier, or country, for key components can be risky. Automotive companies should identify alternate sources, even if it means slightly higher costs, to reduce the chance of production halts. This diversification also helps maintain cash flow continuity by minimizing the likelihood of complete shutdowns.

Strengthen Relationships with Lenders, Vendors & Customers: Maintaining open lines of communication with banks, major vendors, and customers can provide a crucial cushion during tough periods. Automotive businesses should proactively negotiate for extended payment terms, access to working capital lines, reduced LTAs, updated pricing, or revised loan covenants. Lenders, Vendors, Lenders & Customers may also be open to flexible arrangements if they’re informed early and treated as long-term partners. 

Proactively Manage Working Capital and Capital Expenditures: Excess inventory locks up cash, while inadequate inventory limits sales. Balancing the two requires tactical inventory management and constant re-evaluation of reorder points. Effectively managing receipts and outflows from AR and AP is crucial as well, but if you have communicated with your Vendors & Customers already, this should be much more manageable. In parallel, delay non-essential CapEx and prioritize spending on revenue-generating or efficiency-boosting “Continuous Improvement” projects as cash flow allows.

Monitor KPIs and Adjust Quickly: Track leading cash flow indicators such as days sales outstanding (DSO), days payable outstanding (DPO), and days inventory (DIO). These metrics offer early warning signs and allow you to take the necessary actions before cash flow issues escalate. Working Capital management must be a priority during these times.

Recommended Read: KPIs: What You Measure is What You Get

Final Thoughts on Cash Flow Management Amid Supply Chain Disruptions

In an industry as capital-intensive and globally interdependent as the Automotive Industry, supply chain disruptions & uncertainty are likely to remain part of the landscape. However, businesses that adopt a proactive, flexible approach to cash flow management can not only survive these challenges, but, even emerge stronger. By combining strategic forecasting, supplier diversification, customer negotiations, and disciplined Working Capital management, Automotive companies can safeguard liquidity and maintain operational momentum, even amid unpredictable times. 

We are here to help.