Post-covid, manufacturing in the United States is seeing a resurgence, or some might even say – a renaissance. According to a study by the US Bureau of Economic Analysis, the US Bureau of Labor Statistics, and McKinsey and Company, manufacturing is an absolute boon to our economy, with it employing just 8% of the workforce but generating 20% of net capital stock, 35% of productivity growth, and 55% of patents.
Another analysis by the McKinsey Global Institute suggests that restoring growth and competitiveness in key manufacturing industries could boost US GDP by more than 15% this decade.
That said, in order for manufacturing to take off, businesses within the industry need to dial in on cash flow, overcome the most significant hurdles, and find ways to be financially ready for any sudden market swings or unforeseen events.
Cash flow refers to the movement of money into and out of a business. It tracks the amount of cash generated from operations, investments, and financing activities during a specific period.
Cash flow directly impacts a manufacturing business’:
- Working capital
- Inventory management
- Equipment and maintenance
- Research and development
- Procurement and vendor relationships
- Debt servicing
- Financial stability
- Ability to seize on growth and expansion opportunities
In this article, we’ll look at challenges that manufacturing businesses face regarding cash flow as well as eight concrete ways to boost it to keep the machine that is your business up and running.
Common Manufacturing Cash Flow Challenges
Poor Visibility Due to Manual Cash Management Processes
Monitoring cash inflows and outflows can be challenging when you don’t have the tools to automate reporting and analysis for a clear line of sight into cash.
For example, logging into bank portals to download statements, aggregating that data, then normalizing and consolidating it in spreadsheets can take hours. Add to that having several banking partners and multiple accounts spanning various business entities and/or regions— answering basic questions about cash flow becomes a nightmare.
Holding onto excess inventory ties up funds that could otherwise be used for growth initiatives or operational expenses.
This problem is particularly prevalent when there’s poor demand forecasting or ineffective inventory management practices in place.
Unprofitable Production Lead Times
Lead times can impact your bottom line. If these periods are too long without corresponding profitability, they can tie up your capital unnecessarily.
Production Costs Outweigh Sales Margins
When production costs exceed sales margins, it results in negative cash flow. Raw material costs and inefficient manufacturing can lead to negative cash flow when expenses outweigh income.
Tied-Up Cash In Credit
If you offer credit terms to customers but struggle with late payments, this can severely restrict your available working capital. Implementing effective accounts receivable management strategies can help alleviate this issue by ensuring timely collection of customer debts.
It’s important to take proactive steps towards improving your company’s cash flows and overall financial health. By addressing these common challenges, manufacturers can ensure they have the necessary funds to grow and succeed.
How Manufacturing Businesses Can Improve Cash Flow
1. Adjust Pricing Strategy Based On Real-Time Data
To remain competitive, manufacturers must use real-time data to adjust their pricing strategy in response to changing market trends. Real-time data can be a major factor in adjusting pricing strategies to keep up with the market.
2. Embrace Digital Transformation for Increased Efficiency
To ensure the long-term financial stability of your manufacturing business, leveraging technology to gain insight into operations is essential.
“Automation, digitization, and the drive for greater sustainability are changing the way manufacturers produce their products.”– McKinsey & Company
Advanced software and technology solutions can provide you with comprehensive visibility into your operations, enabling you to identify potential sources of cash leakage and improve financial performance. This allows you to pinpoint areas where cash leakage might be occurring, helping improve overall financial performance.
Automated Cash Management
Consider an automated cash management platform if you’re still using spreadsheets to manage cash flow. When transactions are recorded automatically, there’s no chance of transcription error. You can use a tool like Trovata, which leverages open banking APIs to provide an always up-to-date view of your cash position, even down to the day. You can create tags that can track whether cash inflows and outflows are related to operations, financing, or investing.
With automatic cash flow management, you’re able to decipher what the data says about your finances as quickly as possible, giving you a tremendous competitive edge and the ability to respond to crises or growth opportunities as they arise.
AI and ML
Artificial intelligence, machine learning, and advanced technologies are recognized as crucial components in the transition towards innovative systems that can effectively interpret disparate data and introduce a higher degree of synchronization to worldwide supply chains.
Cutting-edge manufacturing leaders are applying AI in automated cash management tools, supply chain management, and logistics to increase efficiency and output.
3. Liquidate Excess Stock For Improved Cash Flow
Got too much stock? Sell it off. Overstocking ties up capital and increases storage costs, hurting your bottom line. But don’t fret. There is an answer to this issue.
Balance Losses Against Storage Costs
Selling surplus stock at discounted prices may seem like a loss, but it’s important to balance this against the cost of storage.
Warehousing can account for up to 25% of a company’s logistics costs.
By reducing these expenses through efficient inventory management, you free up resources that could be better utilized elsewhere in your business.
Plus, liquidation sales offer quick influxes of cash into the business. This improves liquidity and provides funds for core operations or other strategic initiatives.
4. Reduce Excess Expenses To Free Up Capital
In the manufacturing industry, every penny counts. Reducing unnecessary expenses can free up capital that could be reinvested back into your business for growth purposes. Implementing lean manufacturing approaches and prioritizing those expenses which impact your cash flow significantly are two effective ways to achieve this.
Quick Ways To Reduce Regular Business Expenses
Identifying areas where costs can be reduced without sacrificing quality or productivity is a good starting point. This might include renegotiating contracts with suppliers, cutting down on energy consumption by implementing energy-efficient practices, or streamlining operations to eliminate waste.
- Rethink Your Energy Usage: Consider an energy audit to identify potential savings in utilities costs.
- Negotiate With Suppliers: If you’ve been a loyal customer for years, leverage that relationship to negotiate better terms.
- Evaluate Staffing Needs: Are there roles that could be automated? Can part-time staff handle certain tasks?
Cutting excess expenditure isn’t just about slashing budgets indiscriminately; it’s about making smart decisions based on data-driven insights.
And remember: small changes add up over time.
5. Reassess Supply Chain Operations for Efficiency
In the manufacturing business, your supply chain operations can significantly impact your cash flow. By reassessing these operations and making necessary adjustments, you can potentially achieve considerable cost savings.
Seek More Acceptable Sales Conditions from Suppliers
Negotiating better terms with suppliers is one way to enhance profitability. This could mean negotiating for lower prices or more favorable payment terms that allow you to hold onto your cash longer. If a vendor is not amenable to discussion, it could be an indication that you should look for another supplier.
Another approach is looking at opportunities for bulk purchasing discounts or early payment incentives, which might offer substantial savings in the long run. It’s also worth exploring if there are any efficiencies that can be gained by changing delivery schedules or methods.
Beyond just costs, think about reliability too – consistent delays from a supplier could cause issues downstream, leading to lost sales and unhappy customers, which ultimately affects your bottom line.
Streamline Internal Processes
Another area to consider is streamlining internal processes. This could mean automating manual tasks or consolidating redundant steps. Doing so can reduce the risk of errors and free up staff to focus on more value-added activities.
It’s also worth reviewing your inventory management practices. Overstocking can tie up cash and lead to unnecessary storage costs while understocking can result in lost sales. Consider implementing a just-in-time inventory system to optimize your stock levels.
Invest in Supply Chain Technology
Incorporating technology into the supply chain can enhance efficiency. For example, implementing a cloud-based inventory management system can provide real-time visibility into stock levels and streamline order fulfillment.
Another area to consider is transportation management. By using GPS tracking and route optimization software, you can reduce transportation costs and improve delivery times.
6. Upgrade Your Equipment for Long-Term Savings
Do not be deceived by the misconception that replacing your equipment is a needless expense; instead, consider it as an investment for long-term financial benefits. In fact, it can be an intelligent move that improves your manufacturing business’s cash flow in the long run.
Before you upgrade, calculate the operating costs of your current machinery and compare them to the potential savings of new, more efficient equipment. This includes energy consumption, maintenance expenses, and downtime due to repairs or malfunctions.
7. Get Paid Quicker
Perhaps the most essential way to increase your manufacturing business cash flow is to simply get paid faster. To do so, you’ll need to have efficient systems in place to reduce payment delays from customers, which can significantly impact your cash flow.
Screen Customers Before Offering Lines of Credit
The first step is implementing stricter screening processes before offering lines of credit. By assessing the financial health and credibility of potential clients, you can mitigate the risk of late or non-payments. Tools like Dun & Bradstreet’s Business Information Reports can provide valuable insights into a customer’s creditworthiness.
Follow Up Consistently With Debtors
In addition to pre-screening, idon’t forget to consistently follow-up with customers who owe money. This doesn’t mean hounding them daily, but establishing regular communication about outstanding invoices using polite reminders via email or phone calls. You might also consider leveraging an automated invoicing system to send automatic reminders and updates on unpaid bills.
Taking these steps will not only help improve your company’s cash flow but also build stronger relationships with your customers by fostering transparency and open communication regarding payments due. So, don’t wait, start implementing these strategies today.
Opt for Accounts Receivable Factoring
Last but not least, if you are still hard-pressed for cash, you might consider accounts receivable factoring, a type of debtor finance where SMEs sell their invoices to a third party at a discount for an immediate cash injection.
This is an alternative that manufacturers can opt for instead of taking out a loan or suffering through cash flow problems. AR factoring means you can eliminate staggered payment schedules by turning unpaid invoices into instant cash.
One thing to know about AR factoring is that you’re still on the hook for customer credit dues. If enough customers don’t pay the credit they owe to the company that purchased your receivables, you might still be liable for lost fees.
8. Save on Fees with API Payment Processing
It’s taken a while, but corporate payment technologies are finally catching up to the innovation we see from apps like Venmo and PayPal.
For corporates, API payment processing means you can ditch third-party payment providers while simultaneously giving you the benefits of:
- Being able to send real-time payments (RTP), which means you can hold onto your money for longer
- Automated reconciliation
- Enhanced security and status updates
The Bottom Line
Improving cash flow for your manufacturing business can be tough, but it’s possible to make a significant difference with the right strategies and tools.
By implementing these and other proven tactics, you can gain greater visibility into your business operations, reduce expenses, and free up capital to drive long-term success.