How Manufacturers Can Achieve Better Cash Flow Management
Manufacturers need cash to generate revenue. Without it, they might be hard-pressed to attract customers, purchase raw materials, procure equipment and supplies, or pay workers and consultants. Cash flow management in manufacturing can impact key performance indicators and make or break success.
A healthy business generates positive net cash flow from operating activities. Ideally, this flow increases over time. However, even businesses with growing sales and revenue can run into a cash flow problem due to an inability to address external or internal factors.
When a business fails to consistently generate positive net cash from operating activities, it may need to rely too heavily on the availability of credit (or other external financing sources) to operate. Healthy cash flow can position a company to take advantage of opportunities for growth, avoid excessive borrowing, reward shareholders and better survive turmoil in the market and economy.
Navigating cash flow obstacles
Business leaders typically understand the fundamental importance of cash flow management, especially how it can be impacted by external factors such as the economy, the dynamics of the financial markets, unreliable customer demand forecasts and various industry-specific issues.
However, there are also critical factors under management's control that can transform the company's cash flow. While specific solutions can vary across industries and sectors, these key areas can yield solutions for improved cash flow management in manufacturing.
The operations section of the cash flow statement can reveal the strong relationship between cash flow and various financial functions of the business, such as accounts receivable and accounts payable. Scrutinizing all operational processes can uncover ways to improve financial ratios and internal financial benchmarks. Tight production planning and control may prove to be an integral part of cash flow management strategy.
Seek to minimize production and process waste. Aim also to identify specific ways to deal promptly with inefficiencies—across all processes involving materials and labor—as they might arise. For example, improvements in supply forecasting and fulfillment with vendors, as well as customers, can provide tangible results for the bottom line.
Consider optimizing inventories with the goal of shrinking the turnover cycle to 30 days or less, if possible. Don't overlook work in progress as a potential source of inefficiency. Are inputs made available as per schedule to avoid bottlenecks and rush orders?
Investment and financing
Healthy cash flow can also be tied to savvy investment and financing activities. A healthy business may more often show negative net cash flow from financing activities, especially if cash flow from operating activities is used to pay dividends or pay off external financing. Use company lines of credit wisely to ensure quality equipment and plant infrastructure is available when needed.
A successful journey towards better cash flow can start with robust data analytics and reporting. Operational data, along with other information from the business and its external partners, can guide a working capital optimization plan that tackles cash flow management challenges from various points.
Getting customers and doing the work is often not the biggest challenge to cash flow. The key is getting paid promptly for the goods produced. Specialized software may aid in collecting money owed to the company faster and more accurately, and it may help better manage spending. Software-driven data solutions can drive efficiencies in a variety of specific ways, including:
- Making invoicing and payment processing faster, simpler and more accurate
- Collecting and making customer credit and collections information readily available to relevant stakeholders, such as sales representatives
- Integrating sales orders and work order data to manage linked concerns across accounts payable and accounts receivable
- Pinpointing outliers across shipments, freight and bills of lading, further reducing delayed payments or unnecessary tie-ups of internal cash
Combine strategy with the right tools
Think about implementing purchasing cards to help with controls around procurement spend throughout the sales cycle. Automated payables systems can also make cash flow more efficient by speeding up payments and improving security. Tools like these can help you efficiently implement a smart, strategic approach to cash flow management, so you can make your business more predictable and profitable.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.