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Maintaining a healthy cash flow is critical for manufacturers

  • Post published:March 1, 2022
  • Post category:News

During times of economic distress and uncertainty, cash flow issues can quickly bubble to the surface. Managing and improving cash flow can help manufacturers survive tough times and prosper during better times. Every manufacturer is different, so the right cash flow strategies depend on your situation. Let’s take a look at several strategies that might be right for your manufacturing company.

Monitor cash flow

You can’t manage cash flow unless you monitor and measure it. In good times, the income statement usually receives top billing. But in uncertain times, the balance sheet should play a more prominent role. While the income statement is a good gauge of past performance, the balance sheet provides a clearer picture of your current assets and liabilities and the amount of cash you’ll need in the coming weeks and months.

Project cash flow under best-case, worst-case and most-likely scenarios, and have contingency plans in place for each. Monitor your actual results regularly to spot negative cash flow trends early and address them quickly. We can help you create a monitoring process.

Manage customers

Collecting from customers is key to maintaining strong cash flow, so it’s critical to evaluate and manage your customer base. If your business is heavily concentrated in a handful of customers, consider options for growing that base, such as expanding into new markets, developing new products or services, or exploring new marketing techniques. Concentration risks generally happen when one supply chain partner represents more than 10% of your transactions.

Also, be sure to evaluate customers’ credit risks. Have their businesses been negatively affected by the COVID-19 pandemic and the resulting economic turmoil? How has this impacted their ability to pay?

Manage receivables

Examine ways to convert receivables into cash more quickly. Start by ensuring that invoices are issued on a timely basis and that customers receive regular reminders before payments are due. Also consider offering discounts for early payment. And ask for deposits for custom jobs and milestone payments for long-term projects.

Another way to gain some stability in this area is to factor your receivables. Factoring simply means selling receivables to a financial institution or other third party (the “factor”) at a discount. You obtain quick access to cash or a line of credit, and the factor takes responsibility for collecting receivables from your customers. Before you go this route, be sure to consider the pros and cons.

Manage vendors and suppliers

A concentrated supplier base can be just as damaging to your cash flow as a concentrated customer base. Failure of a major supplier can hinder your ability to fulfill orders or meet demand. Consider ways you can build a more diversified supplier base. Even when there are market-wide shortages, casting a wider net can increase the chances that you’ll be able to access supplies sooner.

Also look at your financial relationships. Contact your vendors and suppliers to coordinate the timing of payments. They may be willing to offer extended payment terms or early payment discounts.

Manage inventory

Managing inventory can be a delicate balancing act. On one hand, reducing stock levels of raw materials or inventories of finished goods can help boost cash flow. On the other hand, increasing certain inventory levels can help mitigate supply chain risks and avoid raw material shortages.

Focused inventory management can help you strike a balance between conserving cash and meeting customer demand. To free up cash and reduce storage costs, consider liquidating obsolete or slow-moving inventory.

Improve efficiency

Don’t overlook the potential impact of efficiency improvements on cash flow. Look for opportunities to streamline processes by redesigning the factory layout, optimizing workflows or taking advantage of automation.

Also consider opportunities for cutting or eliminating expenses, either temporarily or permanently. Examples include reducing spending on nonessential travel, meetings, entertainment or training; leasing equipment instead of buying it; reducing work hours; shifting work from temporary to permanent staff; cutting or deferring wages; suspending matching contributions to retirement plans; and delaying capital expenditures.

Review your financing

Revisit the status of your outstanding credit lines and other financing arrangements. Have changes to your receivable or inventory levels affected the availability of credit? Have changes to your balance sheet jeopardized your compliance with debt covenants? If so, request a waiver from the lender to avoid being held in default.

An ongoing priority

Managing cash flow is critical during tough times, but it should be an ongoing business activity. Paying attention to cash flow when times are good can enhance your business’s performance and better position it to weather the storm when the next economic downturn comes along. Contact us with any questions.

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