How to improve cash flow in a manufacturing business

Investing too many funds in building the capacity of your business, especially before any expansion is needed, can tie up your cash unnecessarily. This can be a major challenge for smooth cash flow management for manufacturing businesses.

If you have an excess of funds invested in capacity building you might face a fund crunch when you have to pay for other essential expenses.

The cycle that starts with the purchase of raw materials, to selling, and then ends with actually getting paid the profit can be a lengthy and difficult process. No matter what billing cycle you run, it will take some time for you to get paid.

However, you have to keep your manufacturing system running regardless of this when payments come in. Any imbalance between getting paid and investing in raw materials can become a major challenge.

If you have too much money invested in stock at hand or inventory then that can become a real problem. Keeping too much money invested in inventory can result in the slow movement of cash.

This can often be the result of changing customer demands, inaccurate min-max levels, or uncertainty in the economy. Liquidating these assets will require you to undertake a significant amount of effort as well as the possibility of profit loss.

Unexpected expenses or expenses that have not been accounted for previously can also challenge the smooth inflow and outflow of cash in a manufacturing company. This can include costs like maintenance, repairs, legal trouble or fines, etc.

While these costs are less than ideal they are, however, unavoidable due to their inevitable nature. If you fail to account for such unexpected expenses your cash flow is bound to suffer.

If you face any delays or discrepancies at the time of receiving payment from customers then that’s another hurdle to overcome in cash flow management.

Any funds you have caught up in late or delayed payments means you have cash inflows that are being hampered. This will again have a domino effect on the essential expenses you have to pay to run your business, resulting in cash outflow also being affected.

Credit terms across the world are becoming increasingly constricted. This problem has become especially pressing ever since the pandemic hit.

While on the one side, you may have customers who may delay payments or want to renegotiate extended payment terms.

On the other hand, you may also have suppliers who are demanding faster terms of payment. Either way, your business cash flow cycle is bound to be affected.

High costs of production will directly result in lower profits which, if not addressed efficiently, might further lead to negative cash inflows.

As these costs continue to add up, you might struggle to pay bills on time and defer payments to employees or suppliers.

The first step you can take to improve cash flow in your manufacturing business is to actually track and monitor your cash inflows and outflows efficiently.

Before you can address problems in cash flow management you need to know its current status. A convenient way of doing this is picking a product your regularly sell and calculating its production-to-sale cycle.

Reviewing your expenses or cash outflows can also help you address cash flow problems in manufacturing.

Identify the channels of expenditure that do not have a direct impact on sales or production. You should ideally try to cut out or minimize as much of these expenses as possible and direct your focus instead on expenses that directly lead to revenue generation.

A particularly effective strategy for improving the cash flow management of your manufacturing company is to renegotiate terms with your suppliers, especially with the ones you hold a good relationship with.

Reassess your supply chain and negotiate with your suppliers to broker better deals. You could attempt to negotiate and improve terms of credit, reduce minimum quantities, and get price breaks.

The higher your sales and profits are the more cash inflow your business will generate. You can apply a variety of different strategies to achieve this goal.

For instance, you can expand your target market, add new products and services to your offerings, implement an aggressive marketing strategy, reward regular customers, and induce customers to buy more products.

To prevent delays or discrepancies on the end of clients and customers you can renegotiate your terms of payment.

Ideally, you should push for time or even earlier payment. You can also send out invoices promptly and notify customers before the payment date to prevent delays.

Another strategy you can implement to improve the efficiency with which customers pay you (and therefore your cash inflow) is offering early payment discounts.

Early payment rewards or discounts are a great way to encourage customers and clients to make payments on or even before time.

There are bound to be some customers who frequently fail to make their payments on time, they might even be customers who regularly make mistakes with your payments.

Consider cutting these customers out. This might reduce a percentage of your sales but it will ensure that you only work with customers who are beneficial for your cash flow management.

Cost of production is a major channel of cash outflow for manufacturing companies. If you want to address how to improve cash flow in a manufacturing business you also need to understand how to evaluate and reduce your production costs.

You should not spend on unnecessary equipment, invest in more efficient machinery and consider leasing.

Automation can help you a lot with optimizing your cost control strategy. You should automate as many processes as you can and implement automated software technologies that help reduce business cycle time and improve quality. This includes options such as expense management software and accounting automation software.

Utilizing financing options can help you inject much-needed funds into your business. This can help improve your cash flow management.

Consider availing of financing options such as line of credit or bank loans.

Too much idle stock or inventory is not good news for cash flow management. You should ideally work towards liquidating as much of your old inventory as you can.

You can remarket them, offer discounts, offer product bundles, and even offer this stock as an incentive to boost sales.

Adjusting your current prices can help bring margins up and therefore improve cash inflow.

Reevaluate the pricing model of your products and incorporate any changes in the pricing of raw materials that may have been affecting your profit margins.

Check out article on cash flow analysis if you want to know in detail on how to analyze cash flow statements for your business.