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.
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:
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:
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:
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 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:
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.
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:
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:
Once you have a solution in place to track your cash flow, you can move to the next step.
Cash flow projections for manufacturing companies are great because they allow you to:
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:
When you begin reducing costs, it immediately improves cash flow.
Review your business’s processes and workflows to eliminate inefficiencies. You will need to eliminate:
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.
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.
Next, you need to do something that is very difficult because you’ve likely formed relationships with these entities. However, it’s time to:
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.
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:
The right tools can improve your operations drastically.
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:
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.
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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