The Impact of Special Events: page 27.
Please identify the specific financial risks that would be applicable to each special event, Commodity Price Increases, Competing Product Introduction and Supply Chain Disruption.
Finally, comment on the potential short term impact on your cash flow forecast for each event.
The Cash Forecast can the Llly che on he on: The Impact of Special Events There are a number of special events that can have a profound (and usually negative) impact on the cash forecast. From the perspective of cash management, it is critical to identify these events and incorporate them into the cash forecast as early as possible. Doing so improves the likelihood that sudden cash shortages can be avoided. Here are several examples of special events that can impact cash flows: Commodity price spikes. The price of a key commodity suddenly increases, and the company is unable to pass the increase through to its customers. This will cause a significant jump in cash outflows in 30 days, when supplier in- voices are due for payment. This will impact the transitional period in the cash forecast between the end of the short-term forecast and the start of the me- dium-term forecast. Competing product introduction. A competitor unexpectedly introduces an excellent competing product at a low price point, which immediately drives down the company's market share. This will impact the medium-term cash forecast, as sales drop and cash inflows decline. Supply chain disruption. A flood destroys a key supplier facility. It will take three months to mitigate the supply chain damage. In the meantime, existing buffer stocks of finished goods will be drawn down and sales will then termi- nate for all goods containing the parts provided by the supplier. This will not impact the short-range cash forecast, but may trigger a massive decline in cash inflows from customers over the medium term. War. An insurgency impacts deliveries into a key market in the Middle East, cutting off the company from its distributors. All sales are expected to cease uotil the insurgency can be put down. This will certainly impact the medium- term forecast, and may even roll into the short-term forecast, if the impacted distributors cannot make payments on outstanding invoices. These examples of special events all impact the cash forecast to a major extent. It is entirely possible that a business may be subjected to at least one of these events every year or so. Given the reasonable probability of these occurrences, it is of some im- portance to maintain strong lines of communication with everyone in the company who is most likely to be best informed about these events. This means having ongoing discussions with the purchasing manager to understand changes in the supply chain, as well as with the sales manager to learn firsthand what is happening with the com- pany's products and distribution systems. This enhanced level of communication al- lows for the more rapid inclusion of special events in the cash forecast. ng of at ire n- n- ErC Z- Tip: Include in the forecasting procedure a requirement to contact the purchasing and sales managers for updates on special events. Otherwise, this investigation will likely be forgotten. 27 The Cash Forecast can the Llly che on he on: The Impact of Special Events There are a number of special events that can have a profound (and usually negative) impact on the cash forecast. From the perspective of cash management, it is critical to identify these events and incorporate them into the cash forecast as early as possible. Doing so improves the likelihood that sudden cash shortages can be avoided. Here are several examples of special events that can impact cash flows: Commodity price spikes. The price of a key commodity suddenly increases, and the company is unable to pass the increase through to its customers. This will cause a significant jump in cash outflows in 30 days, when supplier in- voices are due for payment. This will impact the transitional period in the cash forecast between the end of the short-term forecast and the start of the me- dium-term forecast. Competing product introduction. A competitor unexpectedly introduces an excellent competing product at a low price point, which immediately drives down the company's market share. This will impact the medium-term cash forecast, as sales drop and cash inflows decline. Supply chain disruption. A flood destroys a key supplier facility. It will take three months to mitigate the supply chain damage. In the meantime, existing buffer stocks of finished goods will be drawn down and sales will then termi- nate for all goods containing the parts provided by the supplier. This will not impact the short-range cash forecast, but may trigger a massive decline in cash inflows from customers over the medium term. War. An insurgency impacts deliveries into a key market in the Middle East, cutting off the company from its distributors. All sales are expected to cease uotil the insurgency can be put down. This will certainly impact the medium- term forecast, and may even roll into the short-term forecast, if the impacted distributors cannot make payments on outstanding invoices. These examples of special events all impact the cash forecast to a major extent. It is entirely possible that a business may be subjected to at least one of these events every year or so. Given the reasonable probability of these occurrences, it is of some im- portance to maintain strong lines of communication with everyone in the company who is most likely to be best informed about these events. This means having ongoing discussions with the purchasing manager to understand changes in the supply chain, as well as with the sales manager to learn firsthand what is happening with the com- pany's products and distribution systems. This enhanced level of communication al- lows for the more rapid inclusion of special events in the cash forecast. ng of at ire n- n- ErC Z- Tip: Include in the forecasting procedure a requirement to contact the purchasing and sales managers for updates on special events. Otherwise, this investigation will likely be forgotten. 27
