Manufacturers: Financial Planning Tools to Manage Uncertainty

Manufacturers are currently facing uncertainty due to various factors such as rapidly shifting tariff policies, supply chain disruptions, fluctuating demand, and rising raw material costs. To navigate this instability, two proven financial planning tools can be particularly helpful: rolling forecasts and financial modeling.

Rolling Forecasts

Many manufacturers rely on traditional static budgets, which are created toward the end of the preceding fiscal year based on current data. These budgets are often regarded as "set it and forget it," meaning management doesn't review or adjust the figures until the end of the fiscal year.

However, this approach may not be suitable for manufacturers facing frequent changes in their business environment.

Rolling forecasts offer a more reliable and continuous approach to financial planning. Unlike static budgets, rolling forecasts are regularly revised as new conditions arise, enabling more agile responses. Typically, a rolling forecast projects the coming year but is updated at the end of every interim period within that year. For example, when May 2025 ends, May 2026 is added to the forecast, and the numbers throughout the projected year can be revised to reflect the most recent information.

It's important to note that rolling forecasts should not be considered a substitute for traditional annual budgets. Instead, they work in conjunction with the budget, evaluating the predicted figures in light of additional information. Abandoning the initial budget can lead to forgetting the expectations and goals that drove it, potentially revising them downward simply because the rolling forecast is less encouraging at a certain point in time.

Financial Modeling

Financial modeling, also known as scenario planning, provides valuable guidance amid evolving circumstances by testing how various assumptions are likely to unfold 8. This tool is particularly useful when weighing upcoming initiatives that require significant investment and affect cash flow, such as capital asset purchases, new projects, or business expansion.

To model the impact of different tariff policies, manufacturers should first identify all the countries that are part of their supply chains and the applicable tariffs. With this information, they can develop a financial model to project how various sourcing scenarios would affect their finances.

The model should account for costs of foreign vs. domestic sources, labor costs, pricing, cash flow, and profits. Even if large investments are not being contemplated, the results can guide the development of solid contingency plans that leave manufacturers less vulnerable to changing policies and ideally well-positioned to gain a competitive advantage.

Conclusion

Rolling forecasts and financial modeling come with obvious benefits for manufacturers, especially in a tumultuous environment. However, they can be difficult to develop and maintain without adequate resources. Seeking professional help can ensure that manufacturers make the most of these critical tools.