Manufacturers are unique in the fact that cash flow needs to be managed on an ongoing basis. From material acquisition and payroll to accounts receivables, manufacturers must manage the entire process to not fall short on cash flow.
By improving cash flow, you can invest back into many different aspects of the business like customer acquisition, equipment upgrades, research and development of new products, human resources, capital facility improvements, and the list goes on.
What matters most is not only getting the work and completing the job but also getting paid for the work completed. Manufacturing can be one of the worst industries when it comes to collecting the money owed to them on time. Accounts receivable are among many company's largest assets and must be managed properly if the business is to succeed.
There are many ways to improve cash flow and make managing the business easier to operate. Obviously, if there are ways to speed up the collection of invoices, the quicker you can start to capitalize on other projects, but there are also many other ways to sharpen your business to improve cash flow when accounts receivable collection efforts can only go so far.
Being proactive is key. Let's dive into the strategies and checklist of ways to improve cash flow in the short term.
How to Improve Cash Flow for Your Manufacturing Company
1. Tracking Your Cash Flow
The first thing you need to look at when managing cash flow is your data collection and accounting management. Without the proper information in real-time, how are you going to be able to react to cash flow problems with time to spare if you don't have your numbers in order? Conduct an audit of your accounting with an independent bookkeeper or accountant. Ask yourself these questions; what tracking software are you using? Is your cash flow software up to date? Is your bookkeeping staff updating information in real-time daily? If not, you may want to invest in software programs and tools to assist in managing cash flow.
The following is a brief list of popular software programs and tools to consider if you don't already have something similar.
Intuit | QuickBooks- Basic but complete accounting software
Oracle | NetSuite- Complete SAAS solution to run an entire manufacturing business
MISys Manufacturing Software- Reduce inventory costs, Eliminate purchasing errors, Improve production efficiency, Integrate manufacturing and accounting, and Analyze production costs more accurately.
Genius ERP- Genius Solutions delivers a complete enterprise resource planning (ERP) solution, including software, implementation services, and field expertise for small to mid-sized custom manufacturers across the US and Canada. Genius ERP is built for SME…
Katana MRP- Smart and visual manufacturing software tailored for scaling manufacturers using Xero or QuickBooks. Makes production management & raw material inventory control easier than ever.
Xero- Online accounting software for manufacturing.
Float- Float also integrates with many accounting platforms, and it gathers information automatically, which means you don't have to spend time manually inputting data.
Pulse- Cash is the lifeblood of your company, and Pulse can help you monitor it. You can look at your cash flow on a daily, weekly or monthly basis, and Pulse connects with QuickBooks.
Once you have the most effective accounting systems in place to understand your cash flow in real-time, you now need to act on that information and go to step 2.
2. Review and Organize All Operating Expenses
It's one thing to see and know all your expenses, and it's another to find waste and ways to trim. Go line by line and attempt to cut expenses that are not directly tied to bringing in revenue. Sometimes tough choices need to be made but don't rush to judgment, or you may impact revenue indirectly and not know it initially.
3. Re-Evaluate Process- (Changing Process Flows)
Reduce business waste in the process. Business waste differs from industry to industry, and for manufacturers, slow labor and inefficient processes can spike your payroll. Look at your production processes. Interview line managers as well as employees for efficiencies and better ways to complete tasks and improve operations. This can save a lot of money to the bottom line but is probably the hardest to diagnose. Input from everyone in the process is a must because you don't want to make matters worse, which can cost you money and time in the long run. When proper systems are in place, businesses can focus on their customers, sales, servicing, and other areas of the business that deserve more attention.
4. Raw Material Costs & Inventory Management
Renegotiate with suppliers. This can be particularly effective if you have a strong relationship with them. You may be able to negotiate longer credit terms, lower minimum quantities, or price breaks to give yourself some breathing room.
One of the most important ways to improve cash flow is having a strong stock management system and processes in place to ensure efficiency. ERP software with inventory management functionality can avoid issues such as excessive stock levels, inaccurate stock data, and provides a real-time view cash flow. ERP technology can also be a financial management tool and assist you in improving resource planning within your business.
5. Energy Costs
Conduct an energy audit. With an energy audit, you need to take your most recent bill and have other providers review it to see if they can save you money. Second, you need to conduct an audit on the facility to see if you can save money by the way you operate your business. It might be worth it to asking bidding energy companies to conduct an energy audit for you. They will usually do an onsite inspect and go through an energy audit checklist. Many provide this service for free to earn your business.
- Are there machines not running jobs that don't need to be plugged in?
- Do some areas have to have the lights on? Without compromising safety.
- What are your night time and non-business hours of lighting and electrical needs?
- Is there equipment that's draining your electrical system that could be upgraded or replaced?
6. Reduce or Adjust Payroll
Clearly, this is the most difficult area to evaluate, and some of the toughest decisions to make are payroll reduction. Adjusting payroll means; reducing staff levels, eliminating overtime for some, and cutting hours for others. There is a delicate balance of not upsetting the workforce while taking necessary steps. Each employee and their value must be evaluated individually. I strongly believe in taking an individual approach to changes as not all employees are equal when it comes to their work value.
The reality is payroll is the quickest way to make an immediate impact on the cash flow of the business.
7. Sell Off/Liquidate Equipment That Is No Longer Needed
Conduct an audit of all the equipment in your facility. Perhaps there is some equipment that is no longer used or not effective anymore that can be sold in the secondary market. It's a great way to raise some capital and create more workspace as well.
8. Reassess the Pricing of Your Products
Depending on the manufacturer, it might be time to assess your pricing structure against the market. For some manufacturer's this may not be an option to increase or reduce pricing, but for others, it may so it's worth doing an analysis to see where you are pricing wise and determine what is possible and what is not. Also, your relationships with your customers will play a significant role in pricing and to what if anything, can be done to help your cash flow by adjusting your pricing.
9. Accounts Receivable/Collections
The management of accounts receivable is a tricky endeavor. Individual customer relationships matter, and one cookie-cutter approach to a collection of invoices is not a reality. Be proactive with late payers. You need to go through each customer and determine who you will (or will not) extend credit to and run credit checks on all new and non-cash customers before you agree to sell to them on credit. This process is important to avoid as much bad debt as possible.
Some ideas to stimulate the collection of receivables and/or collect additional funds for slow pay include the following;
Offer early payment discounts to encourage early payment. For example, offer a 2% discount if the customer pays in 10 days, instead of the agreed "net 30", which could accelerate payments and improve short term cash shortages.
If you want to provide a deterrent for late payment, you can apply penalties for not paying on time. This may not work for every customer, but it may be an option for others. This will need to be on a case by case decision as a policy for the customer. If you do go down this path, make sure you indicate on the invoice when a payment is considered past due and details about interest on late payments.
Require a Payment Schedule
If you feel a customer has been a slow payer. Stage funding or a payment schedule may be a solution to improve your cash flow. This occurs with an upfront deposit and/or progress payments throughout the process of the work order on your goods for some clients and contracts. This can reduce your risk and keeps you from getting stuck with footing the bill for the full manufacturing cost upfront.
Accept Multiple Forms of Payment
Review all forms of payment methods such as credit card, pay pal, Wire, ACH, and checks. Make sure all methods of payment are accessible to your customers and available for you to receive with an online process. Checks in the mail are a thing of the past.
Consider a Debtor Finance Solution for Customers
Some accounts receivable can be complicated because of the relationship with customers and the extenuating circumstances. Sometimes some out of the box solutions are necessary to be able to collect on late or bad debt. You may have to establish an in-house short term loan on certain or all outstanding invoices for a customer. You may also want to refer them to an alternative business funder to raise money to pay the debt.
On the other side of the coin, if you need money faster than your invoice terms with your customers, you may want to consider invoice factoring. This product allows you to get advanced a large portion of the invoice at the time of consummation, for a nominal fee. This accelerates your payment and can solve short term cash flow issues. See below in the Business Financing Solutions section for details on invoice factoring (financing).
10. Business Financing Solutions for Cash Flow Shortages
Business Financing to support cash flow shortfalls may be necessary when all else fails to cure your cash flow problems. You may also want to invest in equipment or material supply for new clients as well.
Below is a list of the most popular business finance solutions for cash flow.
Invoice Factoring (Debtor Finance)
Invoice financing advances the outstanding balance to a business owner to increase the speed of cash flow to the business. This solution provides cash quickly, and there is no need to wait for outstanding invoices to be collected and received by the client with invoice financing in place. Invoice financing has affordable costs ranging from 1% to 2.5% fee off of the face value of the invoice advanced.
Terms: No term limits
Fees: 1% to 3% fee based on Invoice. Monthly Service fees may apply depending on the volume of invoices factored
Credit Standards: Credit of the Clients need to be favorable NOT the business owner advancing off invoices.
Purchase Order Financing
Purchase Order financing offers businesses the ability to raise capital to pay suppliers upfront for verified purchase orders. Purchase order loans will finance an entire order or a portion of it, depending on the purchase order funder. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. The purchase order funder will subtract their fees and then sends the balance of the invoice to your business.
Terms: No term limits
Fees: 1% to 3% fee for each Purchase Order. Monthly Service fees depending on volume may also apply.
Credit Profile: All parties need favorable business credit history but all credit considered
Business Line of Credit
A Business line of credit is an open revolving line. This type of funding allows business owners to draw funds when needed on-demand or make purchases—a business line charges a principal & interest rate. Business lines of credit do have a credit limit that cannot be exceeded without approval and is not open-ended forever and require renewal either semi-annually or annually to be extended. This business funding is primarily used for small purchases and working capital.
Rates: 5.50% Interest Rates or treasury index plus 1% to 2.5%
Terms: Open revolving line
Fees: Origination Fees ranging from 0% to 3%
Payment: Monthly, Bi-Weekly or Weekly
Credit Standards: Good to Excellent preferred. All types considered.
Short Term Business Loans
Short term business loans are defined as loans that are typically repaid with 6 to 18 months. This small business funding features a lump sum offered up front with a fixed payback amount calculated using a factor rate over a short term of time. Rates are not principal & interest but a "factor rate" that costs more than traditional loans. Most businesses choose short term business loans when they do not qualify for traditional business funding. Short term small business loans charge more for costs and are shorter-term, and the payments are more frequent to compensate for the greater risks business lenders take in offering this product. Short term business loans are popular with small businesses because of the reduced documentation requirements and credit tolerances that are laxer than traditional business loans.
Rates: Factor rates range from 1.09% up to 1.45%
Terms: 6 to 18 months in duration (typically 12 months or less)
Fees: 0% to 5% Origination Fees
Payments: Weekly, Bi-Weekly and in some cases daily Monday-Friday
Credit Standards: All types considered
Resources and Tips
The definition of preparation is "the action or process of making ready or being made ready for use or consideration." When it comes to business cash flow, being proactive is key. You should make sure you have the tools and correct information in front of you in real-time to properly evaluate your manufacturing business every day.
Invest in software and other measurements of your operation before your cash flow concerns occur, so you can take the appropriate informed steps and actions to solve your cash flow problems.
The ten strategies described in this article are a cash flow "stress test" of sorts, which really breaks down areas that should always be analyzing on a regular basis. No stone should be left unturned when it comes to managing cash flow.