The recent trade battle between China and the US has caused much chaos in affected industries. Below Ed Gromann, CPO at Centage Corporation, delves into the challenges now ahead of aluminum and steel companies following the potential introduction of a 25% tariff on imports, offering some tips on preparing for the worst. Tips that can and would apply across most sectors.
On March 1, 2018, US manufacturers learned of a potential 25% tariff on foreign-made steel, and a 10% for aluminum, moves intended to regrow domestic producers. Commerce Secretary Wilbur Ross told CNBC that any price increases will be minimal and offering the cost of a can of Campbell’s soup as a proof point. But the US Chamber of Commerce disagreed, suggesting that “US manufacturers would face more expensive product components and disrupted supply chains, affecting jobs.”
For CFOs of manufacturing companies, there are a number of issues at play. Tariffs have the potential to introduce uncertainty into the market, which means you’ll need to prepare for a variety of scenarios ranging from higher sales driven by a more robust economy, to downsizing if rising raw materials dampen sales.
Second, if your company relies on imported aluminum or steel, you may be looking at a 10% to 25% increase in cost for some materials, which means all of your forecasts are likely outdated (by how much is anybody’s guess).
Third, you’ll need to assess and prepare for the impact of this cost increase on your customers. If there is a significant boost in product cost, sales may decline. Likewise, if countries retaliate by imposing tariffs on your products, sales could decline further.
Ongoing forecasting is the CFO’s best defense for keeping business performance on track, and given the uncertainty manufacturers now face, I believe a rolling forecast is essential. A rolling financial forecast allows you to project out as the year progresses to accommodate trends and changes that affect key business drivers. In this respect, they offer management teams a higher degree of agility, as they will make decisions based on live numbers, not projections.
Another benefit is flexibility. Rolling financial forecasts allow managers to make decisions on a more operational level, which will be instrumental as the cost of steel or aluminum potentially increases. A rolling forecast creates synergy between the financial and operational sides of your organization, allowing you to identify and respond to emerging trends faster.
Although a rolling forecast means extra work, I suspect you’ll benefit by putting in place a system for year-round planning. Given the potential volatility of steel and aluminum prices, and the market for exports, a new cycle of planning could mean that financial forecasting is set to monthly sessions when data is updated and evaluated based on key business drivers.
Typically, with a quarterly rolling forecast, businesses project approximately four to six quarters ahead, irrespective of the calendar date or year. When you plan your rolling forecast, you’ll need to determine up front the duration of your forecasts (how long the forecast should be) and when a new period should be added.
Finally, it’s imperative that you know your drivers. Successful rolling forecasts focus on the core drivers for the business, rather than the minutia. This is critical, as a rolling forecast can quickly become unwieldy, even with a dedicated budgeting tool.
I speak with a lot of CFOs at manufacturing companies, and I always encourage them to adopt a rolling forecast. Most of them had their forecasts upended by the new tax law that went into effect on the first of the year, and the announcement of tariffs upended them again. It’s fair to say that this is the new normal, which is justification enough for the flexibility and agility inherent in rolling forecasts.