The global automotive industry has been particularly impacted by the fallout of today’s pandemic. Idle assembly lines, strained supply chains, and uncertain demand are a few of the concerns that automotive leaders must overcome.
In a previous post, I described how automotive executives can protect and engage their workers. While ensuring the safety of their talent, leaders must quickly deal with the economic fallout. What steps should they take to protect their businesses through the crisis? How can they optimally position their companies for the recovery?
Measuring what you manage
Surviving the next month or two will be an incredible challenge. Before any business decision can be made, management needs to be confident that they are managing the correct numbers.
For example, having accurate financial reporting on the segment, entity, and group levels gives finance leaders a high-resolution picture of their business(es) in real time to make highly targeted decisions. Equally important, numbers from across the organization should converge to generate a trustworthy and single source of truth for the whole organization.
Taken together, the visibility and accuracy of the financial challenges that confront an automotive company create a strong foundation for the difficult days ahead. Without accuracy, any plan, however well-conceived, is at risk of unraveling.
Cash (flow) is king
The next challenge is ensuring finance leaders fully understand the cash position of their organizations. Commercial paper markets (which many companies, including automotive ones, use to finance payroll obligations) remain tight. Such realities make understanding cash information in real-time more important than ever. An accurate tally of daily cash positions is essential to surviving the next 90 days.
From this data, executives should be able to forecast cash balances (in multiple adverse scenarios), plan cash requirements and formulate effective liquidity strategies, including the ability to successfully hedge risks. They should also anticipate and liberate trapped cash and other underutilized resources towards their immediate financial needs.
Automotive finance leaders can then have honest conversations internally and with lending institutions with full knowledge about the true health of their businesses. By doing so, executives can defend their companies through swift and informed action.
Manage your risks
The automotive industry is built on top of incredibly complicated value chains. If one part of this network slows down or becomes inoperative, the financial implications cascade through the entire industry.
Finance leaders need to be aware of critical data, such as deteriorating accounts receivable, and act decisively in real time to stem these issues. Perhaps contracts need immediate renegotiation or covenants waived temporarily to ensure the survival of the organization and its counterparties. (We will explore the full implications of supply chain disruption in a future article.)
In response to the resulting economic disruption, governments around the world have passed stimulus bills. While the financial position of most automakers is much better today than it was during the Great Recession, government funds can fill immediate financing gaps. This is particularly true for smaller companies.
In the United States, the response is on both the demand side and the supply side. Millions of Americans are eligible for direct cash transfers of $1,200 or more if they have families. They are also being supported by better unemployment insurance terms. For large businesses that are struggling, the bill created a $500 billion relief fund. Since the automotive sector is also composed of small businesses, those firms are eligible for $350 billion in loans.
Applying for and ensuring the prompt delivery of these funds are challenges. Loan applications often entail significant reporting requirements. Here again, accuracy and visibility are essential assets for the automotive company seeking funds. If the funds are released for disbursal, finance leaders should be aware of any gaps in their systems that can hold back prompt delivery.
The way back
Thankfully, no crisis lasts forever. The challenge of ramping up operations is in many ways just as challenging as moving decisively to save the company.
Here again, effective analysis of real-time data can be a great asset. Factory-level data can enable FP&A teams to increase their forecast cadence. Supply and demand analyses enable management to gauge the start and strength of the eventual recovery. Running granular forecasts also allows forecasts to be generated automatically by region and type of vehicle. They should be able to answer questions such as: Will lower gas prices in the post-COVID-19 world lead to lower electric-vehicle demand? Is rising employment driving more spending on capital goods on vehicles, or are consumers preferring mobility-as-a-service offerings? Answering these types of questions will enable automotive finance leaders to recommend plant openings, growing headcount, and investment decisions that will determine the future of mobility.
Do you have other ideas for automotive executives to steer their companies through the crisis? Send me a tweet @MannepalliAswin.
Learn “How COVID-19 Exposed Weaknesses In The Global Supply Chain” and what can be done to fix them.