In our earlier article, How governance has become a strategic edge for manufacturing businesses we argued that manufacturers with formal governance arrangements achieved higher productivity and faster recovery after economic disruptions. Building on those foundations, here we look at the financial governance and forecasting disciplines that enable manufacturers to apply governance principles in practice.
For many businesses, the pressure comes from all directions. Energy and labour costs keep rising exponentially, access to capital is tightening and yet investment in new equipment or technology often cannot be deferred. These challenges reinforce a core theme: governance must be deeply integrated with financial management if businesses are to remain competitive and resilient in this heightened, unstable economic environment.
Manufacturers today are dealing with a mix of global uncertainty, geopolitical tension and supply chain unreliability and instability. Input costs move quickly, sometimes without warning. In this kind of environment, relying solely on an annual budget is not enough. Businesses must adopt rolling reforecasts, flexible budgeting to account for material economic changes, three-way financial modeling and scenario planning, including business continuity planning, to remain agile.
These actions assist leaders to comprehend how key variables like changes in freight, movements in foreign exchange rates, cost and access to materials, consumer demand or interest rates will affect profitability and cash flow. Sensitivity analysis, which workshops optimist and pessimistic potential outcomes, provides management and boards with a clearer picture of how much room they have to move on pricing, quality decisions and large capital commitments. This is not just financial housekeeping. It is a key part of governance and helps the whole business make better decisions. Audit & Risk Committees of boards are the ideal forum for consideration of this analysis.
A timely lesson: King Island Dairy
In 2024, one of Australia’s most iconic dairy producers, King Island Dairy, temporarily ceased operations following a decision by its former owner, Saputo Inc., to shut the facility, citing sustained profitability challenges driven by high production costs and increasing competition from lower-cost imported cheese products. In 2025, the business was revived following its acquisition by new owners, who highlighted the need to invest in product innovation, including the procurement of new equipment from Europe, with this transition supported by the Tasmanian Government through more than $10 million in assistance over 10 years, including payroll tax and stamp duty relief.
For manufacturers, the lessons from King Island Dairy are clear: The capability of owners to invest in plant and equipment for their manufacturing businesses and to adequately fund working capital is key to the sustainability of these businesses. It’s also clear the Australian government should be doing more to protect the interests of Australian manufacturers, in the face of rising global competition.
Staying ahead of solvency risk
A major part of financial governance is understanding solvency in real time. Directors have clear obligations under section 588G of the Corporations Act to ensure the business is not trading while insolvent. Conditions can change quickly, and boards need accurate and timely financial information to stay ahead of risk.
Indicators that should trigger further scrutiny include:
- cash flows consistently running tight
- suppliers pushing back on terms and ongoing disputes with suppliers
- challenges refinancing debt
- significant margin pressure
- extended time lags between paying for inputs and receiving cash from customers
- economic dependence on too few suppliers or customers
Good governance requires consistent monitoring of solvency risk, including monthly reporting, along with three-way forecasts, a short-term cash flow model for sensitivity of key variables and clear triggers for escalating concerns to the board. Early intervention to renegotiate debt and equity financing facilities, delay non-essential spending, raise additional capital or seek specialist turnaround advice can support the financial viability in the short to medium term.
Supply chain risk: a financial governance priority
Supply chain vulnerability is a major financial risk for manufacturers. Dependence on too few suppliers, reliance on offshore jurisdictions or exposure to sovereign risk can adversely impact cash flow and production timelines. The time lag between placing orders and receiving goods can put additional pressure on working capital, particularly where forward payment of supply for materials is a feature of the supply agreements.
Financial governance frameworks should evaluate:
- single-supplier concentration and alternative sourcing
- critical materials exposure and sovereign risk exposure
- FX volatility, the need for hedging and freight costs sensitivity
- inventory buffers and stock level management
- supplier solvency and contract protections
Financial governance risks should be formally recorded in a risk register and monitored on a regular basis to enable early intervention and solutions to be implemented. The years since COVID, combined with rising geopolitical tensions, protectionism and the fracturing of global trade dynamics, have demonstrated that manufacturers who had already diversified their supply chain exposure and understood the financial impact of delays or price shocks were able to adjust far more effectively when disruptions occur.
Financial governance as a strategic edge
Importantly, financial governance is not only about avoiding downside. It creates upside too. Businesses that understand their cost base, break-even points, cash requirements and pricing levers can move faster and more confidently than their competitors. They can quote with accuracy, negotiate from a position of strength and invest at the right moments.
In a sector where customers demand reliability, quality and competitive pricing, good financial governance supports all three. It provides clarity, reduces surprises and allows management to act rather than react.
Financial governance and governance more broadly are not checklists. It is a practical, everyday discipline that helps manufacturing businesses stay resilient and adaptable. By strengthening financial oversight, embedding forecasting processes, monitoring solvency and identifying supply chain risks early, manufacturers can better navigate uncertainty and build a stronger foundation for growth.
