As if the world has not been through enough in the past 3 and a half years, we now have yet again a major conflict in the middle east. Besides the tragic loss of precious life brought about by every war and conflict, just like the other raving war between Ukraine and Russia, the effect on the world economy of this serious conflict in the middle east, could be very serious. Crude oil prices have already surged over concerns that Hamas’s attack on Israel will increase tension across the Middle East and affect output from leading oil producers. Such increase in oil prices are likely to prolong the period of high oil & fuel prices, which in turn would continue fuelling inflation across the globe. Whilst, Israel is not an oil producer, there are concerns that the conflict could trigger wider uncertainty in the region and lead to tougher enforcement of sanctions on oil from Iran, who openly backs Hamas’s actions. In essence, such further turbulence is likely to present further challenges that any business needs to be prepared for. Thus, this is surely not the time not to monitor closely all that is happening in your business, with the latest data in your hand. One of the most important things to monitor closely is your liquidity i.e. your cashflow. When interest rates have risen so fast, this is not the time to be caught short of cash or long on inventory….. or both.

Liquidity is often seen as a problem for finance, but, in fact, operations play a leading role in preventing or addressing cash problems. Companies that run a well aligned operational machine that align how operations, sales and finance work together, can generate cash and earnings before interest, taxes, depreciation and amortization (EBITDA) — often quite a lot and often very fast. Strengthening sales and operations planning allows companies to take charge of their destiny regardless of external disruptions — which is a particularly useful capability right now. How can this become a reality?

1. Make sure that operations, sales and finance teams are aligned. When these teams are aligned, they are empowered with knowledge of how the company uses and generates cash. “Aligned” is the key word. Operations and sales planning should be managed in a cross-functional setting. However this on its own will not work. All team members must be explicitly motivated by items that affect cash generation and margin, which aren’t usually among the KPIs that operational and sales team members are measured and rewarded upon. In most companies, the operations team is measured on reducing cost of goods and the sales teams are rewarded on sales volumes achieved. These incentives should be adapted to include cash and working capital measurements (e.g., days of inventory, average discounts, average days outstanding for receivables etc…).

2. Increase visibility: Financial reporting and budgets need to be recast, so they model how predicted levels of purchasing, production and sales will affect all three views of the enterprise: income statement, cash flow and balance sheet. The management teams need an enterprise-wide view of liquidity needs, biggest threats to liquidity, and biggest sources of cash — that is, which products or lines of business consume or churn out the most cash. These reveal to all what levers to pull to defend the companies liquidity. This is needed to get a clear picture of where cash and EBITDA are (and are not) coming from and build out a picture of profits as well as volume. You need to know which products and customers provide the most — and least — profit, and pay close attention to their orders and behaviour.

3. Scenarios : Any business should with its overall budget, create scenarios, for example what will the effect be on cashflow and profitability in the case of high, medium or low turnover. What will happen if sales suddenly shift to the lowest-price or least profitable items you sell? Also predetermine the indicators that would tell you whether a scenario is coming to pass; this will make it harder to ignore warnings.

4. Use the data to take timely decisions: With the knowledge you now have, about the profitability of products and customers, a better flow of information from the field and an empowered cross-functional team, you can now exploit whatever flexibility your operations have, to shift things around as needed. You can decide to prioritise orders from profitable customers. You can decide to change the way your inventory is being handled as inventory can be both a liquidity drain or a new customer-acquisition tool. Thinking long-term, you can redirect capital spending to increase operational flexibility in the areas that have the most direct impact on cash and margin.

Businesses, now more than ever need to be on the ball. They need timely financial reporting and data on key KPIs. The need cross functional teams with clear targets, to help defend liquidity. Businesses cannot wait until the annual accounts are in hand to take decisions, in such turbulent times. If they do so, by the time the pain becomes evident in cash and EBITDA, it’s late — sometimes too late.