Manufacturing businesses must maintain a good balance between cash inflows and outflows. However, these operations face unique challenges such as production costs, extended lead times, shifting demands and supply delays that can negatively affect their cash flow. Being prepared for these obstacles and taking steps to maintain positive cash flow is crucial for a manufacturer’s success.
Understanding Cash Flow in Manufacturing
Cash flow, in a nutshell, refers to the movement of money in, out, and within a business. In a manufacturing business, it can be studied under several key areas:
- Incoming cash from sales
- Outgoing cash for raw materials
- Operating expenses
- Equipment purchase or maintenance
- Investment in research and development
When a manufacturing company sells its products, the influx of cash generates revenue. Of course, before a product can be sold, it needs to be manufactured, which requires upfront costs for procuring raw materials, hiring labor, operating machinery, and many other manufacturing expenses. This necessity to spend before earning money is one of the unique aspects of cash flow in manufacturing.
Unlike many service-oriented or software companies, manufacturing businesses often have a more elongated cash conversion cycle due to the physical nature of their products. The period between the investment in raw materials and conversion into final products that are sold to customers and generate cash—known as the cash conversion cycle—can greatly affect the cash flow of a manufacturing business.
Common Cash Flow Problems in Manufacturing
Given that manufacturing is a capital-intensive process, manufacturers frequently encounter several common cash flow issues.
- Inventory Management Issues: Mismanaged inventory, whether it be excess raw materials or unsold finished goods, can tie up a lot of cash unnecessarily.
- Inefficient Production Processes: Delays in the production process or using outdated, inefficient manufacturing techniques can lead to increased and unplanned costs which impact cash flow negatively.
- Long Sales Cycles: Quite often, manufactured goods don’t sell immediately after production. Extended sales cycles can create cash flow issues.
- Unplanned Expenses: Unexpected machinery breakdowns or urgent maintenance needs can also cause cash flow problems.
- Payment Terms: The manufacturing industry often operates on credit terms which may not always favor the manufacturers. Extended credit periods to customers result in delayed cash inflows.
Identifying and acknowledging these issues is the first step toward improving cash flow management in a manufacturing business. It’s crucial for manufacturers to keenly observe these aspects and formulate strategies accordingly, something we will discuss in our upcoming sections. There isn’t a one-size-fits-all approach, as each manufacturing firm may face unique challenges based on its size, industry, and customer base.
Strategies to Improve Manufacturing Cash Flow
Below, we will look at five strategies to address operational challenges and enhance cash flow in the manufacturing industry.
1. Inventory Management
An inventory shortage can be highly detrimental to your operation, causing you to fail to meet customer demands and lose sales. On the other hand, excess stock uses capital inefficiently. To better manage inventory, you can employ a just-in-time (JIT) management practice, which involves only keeping the stock you need. Another method is materials requirement planning (MRP), which works by using sales records to plan for future inventory needs.
2. Reduced Lead Times
When you purchase materials for production, you expect a profitable return. While that’s a reasonable expectation, you lock up all that cash the moment you make the purchase. The issue arises when production lead times are too slow, making it a challenge to free up capital for other vital investments. You can often reduce lead times by streamlining aspects of production, automating processes and improving internal communications.
3. Invoice Factoring
One of the issues that impact cash flow is delayed payments. When customers take too long to pay the invoices you send, taking care of immediate business needs becomes challenging. Invoice factoring allows you to sell outstanding invoices to a third party at a discount in exchange for cash upfront. Your manufacturing business will get funds quicker without waiting for customers to pay, effectively improving cash flow.
4. Expand Your Target Market
When you’re seeing a low cash inflow due to insufficient sales or a decrease in demand, you should consider expanding your target market. Reaching a new market might be achieved through developing a new marketing strategy, expanding your territory, or adding new services or products to your inventory.
5. Reevaluating Costs
Running a manufacturing business can be expensive when you factor in production, equipment and overhead costs. Assess these costs to find places where you can cut unnecessary expenses.
Find Alternative Financing Solutions With Porter Capital
Porter Capital offers funding for all the ways you do business. We provide numerous financing solutions, including invoice factoring, accounts receivable financing and working capital loans to help enhance your cash flow. Contact us today to begin the process.