How to Improve Cash Flow for Manufacturers: 10 Ways to Enhance Your Working Capital

Business Expansion

Jacques Famy Jr
Review By Todd Millman

Manufacturers are unique in that cash flow needs to be managed continuously. Manufacturers must manage the entire process, from material acquisition and payroll to accounts receivables, to not fall short on cash flow.

By improving cash flow, you can invest in many aspects of the business, like customer acquisition, equipment upgrades, research and development of new products, human resources, capital facility improvements, etc.

What matters most is getting the work, completing the job, and 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 companies' largest assets and must be managed properly if the business is to succeed.

There are many ways to improve manufacturing cash flow and make managing the business easier to operate. Obviously, if there are ways to speed up the collection of invoice, you can start to capitalize on other projects more quickly. Still, 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 for effective manufacturing cash flow. Let's dive into the strategies and checklist of how to improve cash flow in a manufacturing business.

How to Improve Cash Flow In A Manufacturing Business

Here is a list of strategies to improve cash flow in the manufacturing business.

1. Tracking Your Cash Flow

The first thing you need to look at when managing cash flow is your data collection and accounting management. In this blog post, we delve into the intricacies of cash flow management in manufacturing businesses, beginning with the importance of robust data systems.

Harnessing the advantage of inventory management monitoring systems, and keeping a vigilant eye on cash inflows and outflows in real-time becomes less of a challenge. Initiate with an audit of your accounting with an independent bookkeeper or accountant. Assess elements like your tracking software, its currency, and if your bookkeeping staff is updating information daily.

Does your accounting system meet current demands or fall short? If the latter, investing in cash flow management software and tools highlighted in this blog post might usher substantial change. Implementing these can enhance the accuracy and efficiency of cash flow forecasts.

The subsequent listed software programs are worth considering for improved cash flow forecast and management through evidence-based decision-making.

  • Intuit | QuickBooks - Basic but complete software to facilitate proficient tracking of your inflows and outflows.
  • Oracle | NetSuite - A comprehensive SAAS solution to run an entire manufacturing business, guaranteeing precision in forecasting.
  • MISys Manufacturing Software - Efficiently manages cash outflow through cost reductions, purchasing error elimination, and accurate production cost analysis.
  • Genius ERP - A complete resource for small and mid-sized manufacturers, instrumental in maintaining accurate, timely, and relevant (ART) accounting records.
  • Katana MRP - Specialized solution for Xero or QuickBooks users offering smart and visual cash flow management.
  • Xero - A proficient online accounting software for manufacturing businesses, providing clear line of sight into cash inflows and outflows.
  • Float - Float provides automatic data gathering integrated with many accounting platforms, ensuring accurate cash inflow projections.
  • Pulse - With Pulse, monitor your cash inflow and outflow daily, weekly, or monthly, and remain proactive in your cash flow forecasting.

Once you have implemented the most effective accounting systems aided with inventory management monitoring to track your cash flow in real -time, you can make insights-driven decisions based on cash flow projections. This effectively prepares your business operation to move 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.

  • An essential step in achieving this is by meticulously investigating and cutting costs related to excess expenses, which aren't directly contributing to revenue generation.
  • Carry out a detailed line-by-line analysis of your outlays, weaving in overhead costs like rent, utilities, insurance, taxes, along with other expenses distinct to production.
  • A recommended strategy is to connect with your suppliers and, leveraging good relations, negotiate for lower prices or secure discounts on bulk orders, which could lead to significant expense savings.
  • It's worth bearing in mind that vendors are typically more than eager to accommodate reliable customers who consistent and prompt in their payments.
  • Avoid hasty financial decisions as these could have unforeseen implications on your revenue stream.
  • Opt for strategic, data-driven cuts that can minimize potential harm to your business's performance and accelerate cash flow, thereby empowering your enterprise with valuable insights and freeing up funds for growth initiatives.

3. Re-Evaluate Process- (Changing Process Flows)

Reduce business waste in the process. Business waste, particularly emanating from inefficient processes, can present considerable obstacles and hinder productivity while bloating your expenditure to a far greater than minimum level.

  • Ensure you're paying keen attention to all your production processes, considering both macro and micro aspects, with an emphasis on sustainability and long-term efficiency.
  • It's crucial to have dialogues with line managers and employees to uncover potential pathways to streamline processes, bolster operational efficiency, and consequently reduce operational costs. Once these optimized, efficient processes are in place, you'll notice a decrease down to the minimum in business waste, coupled with a significant boost in productivity.
  • Be conscious, however, as change management can prove challenging—it requires the united, long-term effort of the entire team to prevent issues that could negatively affect your bottom line from escalating.
  • Prioritize process optimization over automation and digitization—they are indeed valuable additions to bolster efficiency and cut down lead times, but they should not be the first line of action.

After implementing these robust, efficient systems, manufacturers can then refocus onto customer-centric elements like sales, servicing, and nurturing long-term, trustworthy customer relationships.

4. Raw Material Costs & Inventory Management

Renegotiate with suppliers. Undertaking this requires having effective vendor management and nurturing strong supplier relationships, including solid vendor contracts.

  • The offers suppliers make can frequently include discounts for large or frequent orders, or even for prompt vendor payments made in advance, contributing significantly to effectively managing your inventory levels. Implementing a rigorous, real-time inventory management system, preferably one that provides complete visibility into all aspects of your manufacturing inventory, is one of the most crucial strategies to improve cash flow.
  • Incorporation of a cloud-based inventory management system can stave off excessive inventory holding, inaccurate stock data. It provides continuous updates of your inventory check, leading towards a close-to-real-time cash flow status with a comprehensive overview of your vendor payments. Moreover, this system assists in aligning your inventory levels with customer demand, thus not only reducing costs, but also enhancing customer satisfaction, and helping decrease inventory holding costs. Such advanced inventory management technology also serves as a financial management tool that can aid in refining 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 potentially offer substantial savings, which in turn enhances your company's sustainability.

  • Excess money can be further maximized by automatically transferring it to a savings account through options such as a sweep account offered by most commercial banks.
  • Assess your operational methods in view of sustainability. Audit your facility to evaluate if money-saving changes can be implemented without compromising the core business activities. Bulk purchasing discounts or early payment incentives observed during this phase might provide significant savings as well as contribute towards sustainability in the long run.
  • Seeking assistance from energy companies to conduct an energy audit could be beneficial too. They usually conduct an onsite inspection and go through an energy audit checklist—many offer this service for free as a part of their sustainability initiatives to gain your business. The audit consists of;
  • Are there machines not running jobs that do not need to be plugged in?
  • Do some areas need to have the lights on? Be mindful of this without compromising safety.
  • What are your nighttime and non-business hours for lighting and electrical needs?
  • Is there equipment draining your electrical system that could be upgraded or replaced for sustainability?

6. Reduce or Adjust Payroll

Clearly, this is the most difficult area to evaluate, and some of the toughest decisions are payroll reduction. This reduction, mainly during an economic downturn, is about strategically scaling back expenditure - not a rushed slashing of budgets, but a considered decision based on data-driven insights. It's a direct way to wrestle with significant overhead costs that form part of your manufacturing business's financial liabilities. Expertly dealing with fluctuations in profitability, adjusting payroll could mean reducing staff levels, eliminating overtime for some, or cutting hours for others.

Such a strategy demands a fine balance to refrain from destabilizing the workforce while taking necessary steps. Each employee and their value to the business are accounted for individually in this systematic approach to limit liabilities. I vouch for this individualized approach to change, mainly because not all employees are equal regarding their work's value. By utilizing cost accounting, you can accurately trace the exact cost impact of each employee, spotlighting their unique contribution to your overhead costs or liabilities.

In reality, adjusting the payroll is typically the quickest path to instantaneously enhance the business's cash flow, especially during a downturn, thereby reducing liabilities.

7. Sell Off/Liquidate Equipment That Is No Longer Needed

Conduct an audit of all the equipment in your facility. With an eye on your surplus stock, you may identify equipment that is no longer needed or as effective. Selling off such machinery in the secondary market is an excellent means of leasing some capital, while also freeing up room in your workspace. Not only can your surplus stock be utilized in this manner, but the reduced storage costs can contribute to enhancing your cash flow.

Calculate the operating costs of your outdated equipment, compare them with the potential savings gleaned from new, energy-efficient systems, and consider the perks of equipment leasing. It's an alternative financing method that circumvents sizeable upfront costs and can even offer tax benefits.

8. Reassess the Pricing of Your Products

Depending on the manufacturer, it might be time to assess your pricing structure against the market. As per our research, this scrutiny allows manufacturers to alter their production and employ adaptive pricing strategies which can increase profitability. For some manufacturers, this may not be an opportunity to raise or diminish pricing, but for others, it could be valuable. So, conducting an analysis to gauge where you stand price-wise and determining the realm of possibilities is crucial.

Your relationships with your customers can influence the pricing, and perhaps as a bonus, forecast sales cycles. Ever thought about the possibility that altering pricing, offering customer discounts, or incentives in $500 increments could boost your cash flow? It's definitely worth considering.

9. Accounts Receivable/Collections

The management of accounts receivable is a tricky endeavor. To maintain your business's creditworthiness, each customer relationship must be treated with importance; a one-size-fits-all approach to invoicing and collecting payables is neither practical nor efficient, especially in a pandemic period.

  • Run Credit Checks. Utilizing tools like Dun & Bradstreet’s Business Information Reports for running credit checks on all new and non-cash customers before selling on credit is advisable. This step is vital in streamlining ar processes and dodging as much bad debt as possible during these unpredictable pandemic times.
  • Keep a sharper eye on late payers. Set up regular communication via polite reminder emails about outstanding invoices. This is not about hounding them daily, but fostering a non-confrontational dialogue to expedite payment. Improvement in the production efficiency of your accounts receivable team can also be achieved by identifying areas for streamlining.
  • Consider using an automated invoicing system to send invoices and automatic reminders about unpaid bills. The faster your company dispatches invoices for goods, the sooner payment can be received. Such strategies enhance transparency in the invoicing process and provide consistency in follow-ups.
  • Discounts. 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.
  • Penalties. 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 a case-by-case decision as a policy for the customer. If you go down this path, indicate on the invoice when a payment is considered past due and details about interest on late payments. Require a Payment Schedule
  • Stage funding or a payment schedule may be a solution to improve your cash flow, if you feel a customer has been a slow payer. . This occurs with an upfront deposit and/or progress payments throughout the work order process 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 payment methods such as credit card, pay pal, Wire, ACH, and checks. Make sure all payment methods 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 customer relationship and extenuating circumstances. Sometimes some out-of-the-box solutions are necessary to collect on late or bad debt. You may have to establish an in-house short-term loan on a customer's outstanding invoices. You may also want to refer them to an alternative business funder to raise money to pay the debt.
  • Invoice Factoring. if you need money faster than your invoice terms with your customers, you may want to consider invoice financing This product allows you to advance a large portion of the invoice for a nominal fee at consummation. This accelerates your payment and can solve short-term cash flow issues. See the details below in the Business Financing Solutions section for invoice factoring (financing).
how to improve manufacturing cash flow

10. Business Financing Solutions for Cash Flow Shortages

Financing to support cash flow shortfalls may be necessary when all else fails to cure your cash flow problems. By doing a careful analysis of your 2018 financial records, one strategy to ensure your operating expenses do not exceed your budgets and assist in cutting costs.

You may also want to consider investing in cost-effective acquisitions, such as updating your computer systems, buying new furniture, or even replacing company vehicles. Think of these expenses not as unnecessary costs but investments that pave the way for long-term financial success.

Suitable financing options with low or no interest for the initial period of the loan could serve as life-saving solutions. Alternatively, for equipment investments, you could consider lease agreements, which allow the acquisition of equipment without the upfront cost, thereby improving your business liquidity and reducing expenses. Should you foresee a need for extra cash, consider discussing a bridge loan with lenders to support future financing endeavors.

Below is a list of the most popular business finance solutions for managing 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.

Product Overview

Rate: None

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: The credit of the Clients need to be favorable, NOT the business owner advancing off invoices.

Purchase Order Financing

Purchase Order financing allows businesses to raise capital to pay suppliers for verified purchase orders upfront. Purchase order financing advances cash to the business to complete the transaction. Suppliers will not ship purchases until they are paid so a Purchase order finance company can come in handy. The purchase order financing company collects payment for an order and will subtract their fees and then send the invoice balance to your business.

Product Overview

Rate: None

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 credits considered

Business Line of Credit

A Business line of credit operates like a credit card in that it is a revolving line of credit open up to a predetermined credit limit that charges interest for use. Funds can be drawn on demand when needed for quick purchases, jumping on a time-sensitive business opportunity or paying business expenses. Business lines of credit are not open-ended and require renewal or review by the financial institution that issued it either quarterly, semi-annually, 12, 18, 24, and even out to 36 months

Product Overview

Rates: 5.50% Interest Rates or treasury index plus 1% to 2.5%

Terms: Open revolving line

Fees: Origination Fees range 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 within 6 to 24 months. This small business funding features a fixed amount lent, with a fixed term and fixed payment. Short-term business loans can be principal & interest rates or a "factor rate". This option is used when a business line of credit or traditional term loan is not an option. Although short-term small business loans cost more and the payments are more frequent to compensate for the greater risks, they are a great alternative. Short-term business loans have more lenient credit requirements and less documentation than traditional loans, therefore have higher approval rates.

Product Overview

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 On Pinpoint Strategies To Improve Cash Flow

To enhance your cash flow, an effective approach is to meticulously scrutinize your monthly expenses such as internet, phone bills, software support, and janitorial/building maintenance contracts. This strategy allows you to pinpoint areas where cash leakage might be taking place and thereby improve overall financial performance.

tips to improve cash flow

The Bottom Line

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 ensure you have the tools and correct information in real-time to 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 analyzed regularly. No stone should be left unturned when it comes to managing cash flow.

Jacques Famy Jr

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