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Cash Flow: 7 Tips for Manufacturers

11/01/2023 Karen King, Glen Selby
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When times are good, manufacturers tend to focus on sales, profitability, and growth. Strong growth can conceal cash flow issues. Cash flow is the lifeblood of a business, so it’s critical to develop a strategy for managing and improving it. Every manufacturer is different, so the right cash flow strategies depend on your situation. Here are seven tips to consider.

  1. 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. Talk with your CPA to create a monitoring process.

  1. Manage Customers

Customers play a large role in your cash flow; therefore, it’s critical to evaluate and manage your customer base. Is your business heavily concentrated in a handful of customers? Consider options for growing that base, such as expanding into new markets, developing new products or services, and 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 risk on an ongoing basis. Has economic turmoil negatively affected their businesses? How has this affected their ability to pay?

  1. Handle Receivables

Collecting from customers is key to maintaining strong cash flow, so examine ways to convert receivables into cash more quickly. Start by reviewing new customers’ credit, assigning the correct payment terms, and reviewing them on an ongoing basis. Ensure that invoices are issued on a timely basis and that customers receive regular reminders before payments are due.

Consider offering discounts for early payment. Ask for deposits for custom jobs and milestone payments for long-term projects. Look into factoring your receivables. (See the right-hand box, “Pros and Cons of Factoring Receivables.”) If you accept credit cards as a method of payment from your customers, do not extend payment terms and require payment upon delivery of the product or service. Also consider charging a convenience fee to cover the expense you incur for merchant fees.

  1. 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. Contact your vendors and suppliers to coordinate the timing of payments. They may be willing to offer extended payment terms or early payment discounts.

Fraud can also severely impact cash flow.  Make sure to verbally confirm vendor’s banking details before initiating the first electronic payment to them and implement positive pay services offered by your bank.

  1. Balance 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.

  1. 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.

  1. 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.

Pros and Cons of Factoring Receivables

Uncertainty about collecting accounts receivable is one of the biggest cash flow challenges businesses face. A way to gain some stability in this area is through accounts receivable factoring. Factoring simply means selling receivables to a financial institution, law firm, 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. Pros include immediate access to cash and avoidance of many of the headaches associated with collecting from customers. Cons include the expense — factoring fees can be higher than interest rates on commercial loans — and potential customer confusion. Despite the expense, for many struggling businesses, factoring is one of the options available for obtaining cash quickly.

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. For any questions related to this article, please contact Karen King at kking@vlcpa.com or Glen Selby at gselby@vlcpa.com, or call 800-887-0437.

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