It’s easy to think of one’s own business as one of the more important ones in an economy, but it wouldn’t be an overstatement to say that our lives depend heavily on manufacturing. All of the goods and products we use have been manufactured by a company; for the sake of our convenience and the economy, it is necessary for these companies to thrive.
One of the most important things that can influence the success of a manufacturing business is its cash flow. Learning to manage and improve this cash flow is necessary to stay competitive; let’s look at some of the cash flow challenges you can expect to face in the manufacturing industry.
Common Manufacturing Business Cash Flow Challenges
1- Business cycle length
The first cash flow challenge is actually getting the cash! From raw material procurement to selling goods, getting any money out of those raw materials can take weeks to months. Even after selling your product, you may be waiting 1-3 months for actual cash. Of course, you can’t stop your production line to wait for your last shipment to pay off. Thus, you’re often working on ‘advance’; you’re paying to produce future goods before your past ones have, fully or partially, paid off. To complicate things, you may be juggling multiple suppliers, each with their own payment terms.
2- High Overhead Costs
Raw materials and components aren’t your only costs. To maintain your business, you’ll also be facing costs in the form of energy bills, wages, and loan repayments, among possibly others. These costs, if managed poorly, may result in you delaying your own payments, damaging your market standing, and potentially spiralling towards your business’ demise.
3- Economic Uncertainty
Uncertain conditions have created cash flow strains for many businesses. Everyone is under greater pressure to make their payments. As you will be feeling the ‘squeeze’ from suppliers, your clients will also be trying to manage their payments, which will include the ones they are to make to you.
In addition, your clients may have changed their buying patterns. If you’re in the ‘essentials’ manufacturing business, you may see an increase in demand, and a decrease otherwise.
Read more: Tips to Succeed with your Manufacturing Business
Improving Your Cash Flow
It’s not all doom and gloom though; here are some of the ways you can take your cash flow matters into your own hands.
1. Review Expenses: keep an eye on and study your expenses; trim these by removing or minimizing any costs that do not influence sales or production directly.
2. Waste Reduction: wastage, whether material or time, may end up being a significant drain on your available resources. You’ll want to study your processes and make sure neither is happening.
3. Cash Flow Tracking: make sure you have a system in place that allows you to see where your cash is going and when. Make sure you know the average time between purchase of raw materials and payment receipt, as well as the time taken in each step of the process.
4. Incentivize Early Payments: Rather than deal with late payments when they actually trouble you, try to make it more appealing for clients to go out of their way to make good on their payments as soon as they can.
5. Draw Up a Payment Schedule: As a fail-safe, you want to make sure you cover your financial bases. Ask for an upfront deposit or milestone/progress payments from some of your clients and contracts.
6. Renegotiate with Suppliers: The stronger your partnership with your suppliers, the more leeway you have in trying to bargain for an easier time. Try and get longer credit terms, price breaks, or lower minimum order quantities. These little bits and pieces can add up and give you more flexibility in your daily dealings.
7. Follow-up on Payments: Make sure you are doing more than just invoicing your clients. Some clients may simply be trying their suppliers’ patience to see who they can delay their payments with. Frequent follow-ups will reduce the time it takes for you to get your money. If you find certain clients are often having trouble with their payments, you can renegotiate your terms with them or start implementing penalties.
8. Multiple Payment Methods: Make it as easy as possible to pay you. It’s good to make sure you accept all kinds of payment methods, online and offline, so your clients can pay you in the most convenient (and sometimes, only really feasible) way they can.
The Upper Hand
Having cash in hand, and control over cash that will come and go, will give you a good vantage point from which to negotiate better deals with your suppliers, take immediate advantage of opportunities, and have a good cushion for when bad times rear their heads..
Have some questions? Or want to discuss how you can improve your supply chain operations? Talk to our experts today at 03447778111 or click here!
