Cash flow is imperative for manufacturers. Here are the key strategies to maintain financial stability when managing high costs, supply chain challenges and unpredictable expenses.
The manufacturing industry is highly capital-intensive. As a result, many factors can negatively affect the company’s cash flow.
Bank studies have shown that as many as 82% of businesses fail due to cash flow issues. With statistics that high, it’s worth considering where and how you can make proactive changes to improve your company’s cash flow.
In this article, we will discuss the best practices for improving cash flow in a manufacturing business.
What is cash flow management?
As you know, cash flow is the money coming in and going out of your business. The management of those funds involves keeping track of everything to ensure that you have the money needed to meet your financial obligations.
Learning how to manage company cash flow correctly can save your business from going under. According to Forbes, “It’s not just start-ups and small businesses that are failing…but 50% of Fortune 500 companies that existed 20 years ago have disappeared.”
If you want to succeed in a competitive market like manufacturing, understanding cash flow, its impact, and the proven methods of improving cash flow is crucial.
Six common cash flow challenges in manufacturing
If you work in manufacturing, you will know firsthand how precarious cash flow can be. You can spend a lot of your time on a knife edge, where your business is one late payment or unexpected bill away from lacking the funds it needs to meet its payment obligations. And this can be extremely stressful.
Let’s take a look at some of the most common cash flow challenges faced by manufacturing businesses.
1. Overstocking
Meeting supply and demand is a top priority for those in manufacturing. However, sometimes forecasting goes wrong and you invest in the wrong kind of stock.
Whether it was popular for a while but this popularity tapered off or you expected more of an uptake than you had, you can be left with an abundance of stock that nobody’s buying.
Unwanted stock halts cash flow and blocks the supply chain. The longer it remains on the shelf, the higher its risk of becoming obsolete. Now you have to get rid of the unwanted stock and start again. It’s expensive, time-consuming, and frustrating.
2. Over-investing in Staff
When business is busy, things are great. But it can mean that you feel the need to invest in more staff to increase production and help meet customer demand.
While this is effective in the short term, it can lead to cash flow issues and increased costs during quiet periods. This is a waste of company resources and, if prolonged, can ultimately lead to cash flow problems.
3. Lack of digital innovation and automation
Many manufacturing companies are still tracking cash flow data on spreadsheets.
While this isn’t wholly bad, manual tracking can be challenging and it’s easy to make mistakes. What’s more, it’s an inefficient use of time when there are faster methods available.
4. Billing cycle issues
A business billing cycle ends when the payment is received from the customer and the profits are set aside. However, this can take time and unfortunately, in the meantime, manufacturers are required to meet their financial obligations to their vendors.
When there are billing cycle issues, the money being received from customers gets out of sync with the payments due to vendors, leading to cash flow issues.
5. Unexpected costs
Unfortunately, there can be unexpected costs in manufacturing, including:
- Machinery breakdowns
- Quality control issues
- Shortages of raw materials
- Price fluctuations
- Supply chain disruptions
- Staff turnover
These unexpected costs negatively affect cash flow planning and make it incredibly difficult to meet other payments in the interim.
6. Unsuitable production lead times
A production lead time is the period of time from the start of the manufacturing process to selling the finished product. Production lead times are essential for manufacturers to fulfil customer orders.
However, long lead times can put a strain on resources (as well as customer patience!) They can also lead to increased costs because products sit around for longer, requiring storage and insurance, and they can depreciate in value if the delay is particularly long.
Cash flow in manufacturing: why is it so important?
Having a healthy cash flow is extremely important for manufacturing companies which have a lot of upfront costs. Here are a few reasons why maintaining a healthy cash flow is so important:
Operational expenses
Running a manufacturing company is not cheap. From employers and utilities to equipment and development costs that ensure faster manufacturing, a steady cash flow ensures all necessary costs are met to keep everything running smoothly.
Purchase of raw materials
When manufacturers have poor cash flow, they don’t have the funds they need to purchase the raw materials needed for production. This can lead to delays and dissatisfied customers. Purchasing raw materials on time ensures production can continue without delay and that customers receive what they’ve paid for promptly.
Company growth
When cash flow is managed well, manufacturers can invest in the company’s growth and expansion by procuring more staff, developing new products, investing in new stock, and updating their technology and machinery to provide superior service.
Ways to improve cash flow for manufacturing businesses
Here are some of the best ways you can improve cash flow for your manufacturing business.
Streamline financial management
Converting sales into cash quickly is one of the best ways to manage your company’s cash flow. However, you must be proactive. Streamlining your payment processes doesn’t happen with wishful thinking, you need to take action.
Manufacturing businesses often face cash flow challenges due to delayed payments from customers, supply chain disruptions, and high operational costs. Manufacturers can mitigate these challenges by opening a free business account to help streamline financial management. Receive payments directly and access their earnings without waiting for standard bank transfers.
Reduce company lead times
There are a lot of factors that can affect lead times. For example, cash can be held up in product development. This can turn into a major problem if your lead times are particularly long as it delays you receiving payment. Manufacturers should work on reducing lead times to help with this.
A few effective ways you can reduce lead times include:
- Automating time-consuming manual tasks
- Improving internal communication and collaboration
- Streamlining work processes
- Upskilling staff by investing in training
When you reduce your lead times, orders are processed faster and customers receive their orders sooner. This generates revenue at a faster rate and allows you to move products through your production line sooner, saving money and keeping inventory moving.
Invest in automation
Automating financial tasks in manufacturing that were otherwise completed manually is critical. It reduces human error, improves efficiency, frees up valuable staff time for other work, and saves costs.
One of the biggest cash flow challenges manufacturers face is late or unpaid invoices. Delayed payments are a huge disruption to business cash flow and chasing these unpaid invoices can be extremely time consuming.
Investing in technology that automatically generates business invoices, sends them out at the appropriate time, and chases late payments can be a huge time saver, while simultaneously removing bottlenecks that negatively impact cash flow.
Incentivising faster payments
Negotiating favourable payment terms with your suppliers can go a long way towards improving cash flow. Whether you could offer a discounted rate for early payment or money off their next invoice, incentivising faster invoice payments is an extremely effective way to get your invoices paid sooner.
Build an emergency cash reserve
Ideally, if you’re in manufacturing you should start building an emergency cash reserve to help cover those unexpected payments.
There are always unexpected costs that crop up in business and having an emergency fund available can help ease these times that otherwise would create a lot of financial pressure.
Of course, building an emergency cash fund doesn’t happen overnight. Much like your pension, you build it up by adding to it little by little. Start by setting aside a small amount each month. You can always build on this as your income increases.
Ideally, you should have at least 3 to 6 months of cash reserves in your business to support you through unforeseen circumstances.
Final words
Manufacturing is an industry used to fluctuations and changing customer behaviours. However, don’t let the many uncertainties of the industry negatively impact your company’s cash flow.
We hope that these methods of improving cash flow help you make some proactive changes that positively impact your company’s bottom line.
For more articles like this, visit our Leadership channel.
