How to improve cash flow in a manufacturing business

Manufacturers are responsible for ensuring an adequate supply chain for wholesalers, retailers, and, ultimately, the end user. When everything runs smoothly, a manufacturing business can be very profitable.

However, manufacturing cash flow issues stemming from inventory management, delayed customer payments, increasing material costs, and other factors can hamper profitability and hurt your business.

With the right adjustments, you can overcome cash flow challenges and keep your company running smoothly. Here's a look at some of the areas that can cause business cash flow issues in the manufacturing industry and how to improve cash flow in a manufacturing business.

1. Inventory management

Optimizing inventory levels is a tightrope that every manufacturing company has to walk. You need enough stock to meet customer demand and avoid shortages, but excess inventory can bog down cash flow.

As you improve inventory management to mitigate cash flow challenges, consider the following points.

Study your current demand and cycles

The better you know your current demand and its ups and downs, the easier inventory management will be. Review the following to get a decent idea of where you stand:

• Historical sales data
• Current market trends
• Customer expectations

Though many companies share similar cycles, such as holiday seasons, each manufacturing business should study its sales data for patterns. Check which of your products might be in higher-than-usual demand and which are stagnant. Be in touch with customers to see if there's any reason (i.e., holiday season) their buying patterns might change.

Determine your inventory requirements

Based on the results of your analysis, you can get a general idea of the raw materials and finished products you need to stock. Include these factors to make your determination:

• Current needs
• Expected growth
• Safety stock

In addition to covering your current orders and expected growth, you'll have to increase inventory levels somewhat to prevent unexpected shortfalls.

Look for time-saving methods for your processes

Shaving time off on the various aspects of your manufacturing business will allow for lower inventory levels, which will significantly help your cash flow management. Figure out how to reduce the time it takes to:

• Purchase materials from your suppliers
• Produce and package your products
• Deliver your goods to your customers

The following are some ideas you can use to help you accomplish this goal:

1. Work with your suppliers to reduce internal lead times for supplies.
2. Ensure your current production methods are efficient.
3. Utilize technology to streamline everything from your production processes to communicating with suppliers and customers.
4. Work on reducing delivery times to customers.

The quicker your processes take, the less raw material and finished product you'll have to stock. This lowers the amount of money your company has to tie up to operate, which improves cash flow.

Improve your internal communication

Discuss inventory management priorities with your team to ensure they understand your goals. Establish methods of communication between departments so that when the sales team secures a big customer that will tax your current resources, it should take little time for the purchasing department to find out that they need to prepare an order for more materials. And production should get an immediate notice that they will have to produce more.

Monitor your changes

As you change your processes, realize that operating at optimal levels requires constant monitoring. Set up specific monthly, quarterly, or bi-annual periods to review how your changes affect your processes and revise your operations as necessary.

Invest in Inventory Management Software

Take advantage of all the benefits inventory management software can provide your manufacturing businesses. This software can give you insights into every aspect of your inventory:

• How much of each item you have in stock
• Where you sourced it from
• How much you paid for it
• Where it's stored
• How much you sold it for
• When you sold it
• Who you sold it to

Your inventory management software can provide endless real-time reports, which you can use to guide your decisions about inventory levels.

2. Good Management of AR and AP

Managing your accounts receivable (AR) and accounts payable (AP) efficiently based on your manufacturing company's needs is crucial to improving cash flow.

Accounts receivable

This portion of your cash inflows is due to you because you've already spent money to buy materials, pay for production costs, and deliver them to your customers. Without these funds, you may have to dip into your lines of credit or use credit cards to cover your cash outflows. If you pay interest on this money, it will further exacerbate your cash flow situation.

While you might not be able to demand that your customers pay their bills upfront, making their credit terms more favorable to you and improving how you collect outstanding invoices will go a long way toward improving your company's cash flow and financial health:

• Revisit the payment terms you're offering customers. See if shorter terms are acceptable to them.
• If feasible, offer discounts and incentives when customers pay upfront or early.
• To make it easier for customers to pay their tabs, offer multiple payment options, such as cash, check, ACH, credit card, etc.
• Charge late payments to incentivize customers to pay on time.
• Be diligent about sending follow-up reminders about outstanding invoices. Use automation software to set up emails reminding customers about upcoming and missed deadlines.
• Assign employees or use outsourced service providers to deal more hands-on with extensively late payment collections.

Constantly working on your AR will improve your company's liquidity and help you promptly manage your business expenses and cash flow.

Accounts payable

This portion of your cash outflows is money you owe because someone provided you with a product or service. If you have negative cash flow, these liabilities can ruin your company. These are some best practices that can help you manage your AP efficiently:

• Use cash flow forecasting to understand your AR, AP, and ability to pay upcoming liabilities.
• Review invoices for inaccuracies before paying them to ensure you're not being charged for items you didn't receive.
• Discuss receiving favorable terms from your vendors to give you more time to pay them.
• When possible, take advantage of discounts your supplier might offer for paying early or on time.
• Avoid late payments by making timely payments or negotiating with vendors to waive late fees.
• If your suppliers offer incentives for paying invoices on time or early, but you don't have the liquidity to do so because customers aren't paying you, consider invoice factoring to raise the cash.
• If you need short-term relief to catch up with your outstanding invoices, look for financing options, such as a line of credit.

Even if you have positive cash flow, managing your AP efficiently can give you more cash on hand, allowing you to use your working capital to enhance your business rather than just pay your bills.

3. Cost control and efficient use of resources

You can often mitigate your business cash flow problems by controlling costs and using your manufacturing company's resources more efficiently. Look through all of your supply chain operations to identify changes and upgrades to equipment, methods, and processes that might increase efficiency and reduce costs:

• Implement just-in-time production processes as much as possible to optimize stock levels and avoid unnecessarily tying up cash for material and labor.
• Research third-party logistic companies to see if outsourcing some of your operations might save you money.
• Periodically review your pricing to ensure you're not overpaying for goods. If you feel you are overpaying, negotiate a better deal with your vendors or price out new suppliers.
• If you order similar items from multiple vendors, discuss bulk pricing and consider switching to a single supplier.
• Look for energy efficiency savings. Consider retiring equipment that uses too much energy. Research how much solar panels might reduce your electric bills and if any state or federal incentives might help you pay for the panels.
• You might be able to save on labor costs by having an automation expert review your operations to see where you can automate. Your IT team can also look for software that can handle tasks previously handled by staff.
• Consider financing options to help you keep your working capital on hand for costly upgrades you decide to implement.
• Monitor your product offerings to see if some are affecting your cash flow and are not worth the profit. For example, some items aren't very profitable but require you to stock expensive materials to produce them.

These ideas and examples are just a starting point so what’s next is cashflow planning which is straight forward with a business planning and analytics platform that allows you to do 3-way forecasting.

Three-way forecasting and modeling takes into account the three primary financial statements: the income statement, balance sheet, and cash flow statement. Whenever adjustments are applied to the balance sheet or profit and loss statements, they seamlessly transfer to the cash flow statement. This ensures a precise reflection of your company’s financial standing and highlights how specific choices influence cash flow. This becomes particularly invaluable for a manufacturing business, where the interplay between sales, inventory, and receivables is intricate.  In Phocas's three-way forecasting model, the mini-driver is a specific metric or parameter that directly influences cash inflows and cash outflows within a manufacturing business. You can make various adjustments to your balance sheet with three ready-to-use templates for debtors, creditors, and stock. Many of the suggestions in this blog can be mapped in these templates.  

Each business in the manufacturing industry is unique and has opportunities for improving cash flow. The best way to maximize your existing resources is by getting employees from each department involved and seek their input into your cashflow planning . Cash flow plays a vital role in the success of your manufacturing business. By being vigilant and on top of your operations, you can figure out ways to improve your cash flow issues.