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How to Improve Cash Flow in a Manufacturing Business

July 22, 2022

How to Improve Cash Flow in a Manufacturing Business

Ariel Gottfeld

Ariel Gottfeld

Manufacturing has a lot of overhead. Often, sales projections fall short and cause the manufacturer to hold on to products for longer than expected. Quickly, you can go from positive cash flow to stagnant or even negative cash flow.

If you’re a company wanting to know how to improve cash flow in a manufacturing business, we’re going to walk you through the steps necessary to fix any cash flow issues that you’re experiencing.

What is cash flow forecasting and why is it important in a manufacturing business?

Before we get started, it’s important to be able to define cash flow and know why it’s important in manufacturing. A cash flow statement for manufacturing company is comprised of:

  • Inflows
  • Outflows

The inflows and outflows are cash going in and out of your business for a specific period of time. However, you cannot include “potential” payments in cash flow because cash flow must be a liquid asset that you can begin using today.

So, let’s assume you have the following:

  • $100,000 of inflows
  • $90,000 of outflows

Using this simple example above, you have $10,000 cash flow for the period. You may also have cash sitting in the bank, but this is a good example of cash flow that you’re making right now in your manufacturing business.

In this case, managing cash flow in the manufacturing industry means keeping money readily available for:

  • Restocking inventory
  • Covering overhead
  • Leveraging investment opportunities
  • More

If you don’t have cash flow, you’ll either need to start using financing or secure loans to pay your debts. Maintaining positive cash flow empowers you to keep operations going without having to take on more debt to run the business.

Cash flow challenges in the manufacturing industry

Cash flow challenges in the manufacturing industry

Cash flow for a typical manufacturing company is difficult to define because every company is different. If you sell goods that are $3, your cash flow will be far different than a worldwide car manufacturer.

However, you may face some of the same cash flow challenges, such as:

  • Overstocked: Unfortunately, products may sit in stock for longer than expected. When inventory remains idle, it ties up your cash and will also add to debt because it demands storage.
  • Over-investment: During busy periods, it’s easy to over-invest in a business. You may purchase new equipment or expand, hoping that sales will remain high. Unfortunately, you’ll still need to pay these debts even if sales no longer justify the investment.
  • Allowing too much credit: Issuing credit or allowing customers to pay their invoices NET 30 – 90 can cause cash flow to dry up and lead to significant problems. There's also the risk that the customer may fail to pay for the product, too.
  • Seasonal demand: Busy seasons can leave a business flush with cash and then cause cash flow problems once the season is over. Poor cash flow management during this time is a major concern.

Additionally, taking on too much debt responsibility during busy seasons can cause you to continue the responsibility of this debt over the long term.

Understanding your liquidity issues will require you to run a cash flow analysis for manufacturing company to pinpoint key issues holding your business’ cash flow back. However, the following are good ways to positively improve your cash flow.

Several ways to improve your cash flow

Improving your cash flow demands a well-planned approach that looks at multiple ways to improve cash flow rather than one. If you want to begin improving your cash flow, use the numerous steps below:

Track your cash flow

First, you need to begin tracking your cash flow. Software is the best option to track your cash flow in real-time. When you track cash flow, you can see if you’re having any immediate issues with cash and can react to:

  • Avoid missing debt payments
  • Keep business running smoothly

Once you have a solution in place to track your cash flow, you can move to the next step.

Practice forecasting

Cash flow projections for manufacturing companies are great because they allow you to:

  • Identify when you may have cash flow problems
  • Learn trends in your cash flow
  • React to potential issues in advance
  • Forecasting isn’t 100% accurate, but it’s a good way to get ahead of potential cash flow issues before they negatively impact your operations.

Review expenses and reduce costs

You have a lot of data to work through already, and it’s a good time to review all of your expenses. A cash flow statement will have all of the expenses of your business listed, and each item should be reviewed.

When you have a good understanding of your expenses, you can finally begin to increase your cash flow.

Your business has some static costs that must be paid. For example, you certainly have overhead for utilities and potentially rent. You won’t have much opportunity to reduce these expenses quickly.

However, you can look through the statement to find key areas of inefficiencies.

Perhaps you can:

  • Negotiate better deals with suppliers
  • Restructure debt to save money
  • Eliminate products or raise prices
  • Etc.

When you begin reducing costs, it immediately improves cash flow.

Eliminate inefficiencies

Review your business’s processes and workflows to eliminate inefficiencies. You will need to eliminate:

  • Products with low profit margins
  • Redundant teams or employees
  • Etc.

Streamline processes

When was the last time you reviewed your processes? You should sit down with managers and team leaders to review the entire manufacturing process. The key is to look for areas of inefficiency that you can improve upon.

Streamlining processes and keeping a LEAN operation maximizes profits and lowers expenses.

Ask for a deposit upfront for custom or long-term orders

If you need to dedicate a lot of time and resources to a certain manufacturing project, it’s imperative to ask for an upfront deposit. For example, if a project is going to take four months to complete, you don’t want to absorb these costs.

Instead, ask for an upfront deposit and even milestone payments to keep cash flow positive.

Evaluate your customer and supplier bases

Next, you need to do something that is very difficult because you’ve likely formed relationships with these entities. However, it’s time to:

  • Evaluate customers to outline which ones are causing your cash flow to struggle
    • Evaluate suppliers and discuss potential discounts with them

You may need to “fire” a customer or even switch suppliers to improve your cash flow. These are very difficult decisions to make, but they’re a necessity in the business world. Often, you can negotiate with both of these parties to come to a better agreement for your business.

Use the right tools

You'll also want to make sure that you’re using the right tools for running cash flow statements and improving your business’s operations. You'll want to consider tools that can help your business track:

  • Cash flow
  • Inventory
  • Customer payments

The right tools can improve your operations drastically.

Best Cash Flow Forecasting Software for Manufacturing Business

Best Cash Flow Forecasting Software for Manufacturing Business

You need to begin tracking your cash flow, and one way to do this is to use software. Rather than recommending a solution like Cash Flow Frog, you need to look for software that:

  • Integrates to your current accounting software, such as Xero
  • Offers the option of generating statements for specific periods of time
  • Helps forecast cash flow for a specific period of time
  • Etc.

If you find a cash flow product that offers these solutions, you’ll have a better overview of your cash flow and how it can help your business.

Create the best cash flow statements for a manufacturing company

Now that you know how to improve cash flow in a manufacturing business, the next step is to begin creating cash flow statements. You can hire an expensive accountant to do this for you, or you can use Cash Flow Frog.

You can use our free trial to get started on your cash flow statement for manufacturing company today.

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